401(k) Portable Into Simple IRA and Loan Repayment

Submitted by Dean Strom on Thu, 2018-07-26 20:57

I have a complex situation and could use some help. About 15 years ago, client set up a 401(k) plan, from scratch. This was probably over kill for the situation or at least overly ambitious. The company was a U.S. distributor for a product made and headquartered overseas. The person who set up the 401(k) plan made himself the trustee and for years was the only employee. In hindsight we realized that a 401(k) plan was way more than we needed. He has since hired one other employee…so there is a grand total of two people in the 401(k).

Now the person who set up the plan, and is listed as the trustee, is leaving the company. We want to dissolve the 401(k) plan and rollover the two participants money into their own IRA. Question 1: Is this a problem?

To complicate matters, the main participant (and soon to be former trustee) is going to another company (he will again be the U.S. distributor for a product made and headquartered overseas). We want to set up his new plan in a way that he can contribute somewhere in the neighborhood of $12,000 per year…so obviously a Traditional IRA is not an option. Question 2: What’s the best option for the new plan, SEP-IRA? Simple IRA? Solo 401(k)?

To complicate matters even more, the main participant has a loan on his 401(k). He has been paying the loan back, with each on-going 401(k) contribution. And he’d like to continue repaying the note in whatever new plan we start. Question 3: Would any new plan allow for him to continue to repay the loan?



Submitted by Alan - IRA critic on Sat, 2018-07-28 01:02

  • If the current company will survive, the remaining owners should make a decision about the future of the 401k plan. Either way, the client will be able to do an IRA rollover since he is separating from service as well as resigning as trustee of the plan.
  • With client’s new function, if self employed he can set up any of the plans. A solo K will allow for higher contributions if he ever wants to exceed 12k but if he hires anyone it will have to be amended to a regular 401k. A SIMPLE IRA will have requirements for covering any future employees, but will limit his deferrals if the 12k becomes insufficient. He may not know at this point which direction this venture will go, so he may not be able avoid changing his election of a plan in the future.
  • The current 401k loan cannot be transferred to the new plan, except for a remote possibility of finding a provider of a solo K that will accept the loan. I think that will be very difficult, as many larger company 401k plans with many employees will not accept a loan transfer.

Submitted by Dean Strom on Mon, 2018-07-30 15:20

Thanks for your help with this one…it threw me for a loop.  Appreciate all the comments and suggestions.

Submitted by David Mertz on Sat, 2018-07-28 14:33

With regard to the loan, when the client leaves the original 401(k) plan the loan will be satisfied with an offset distribution.  If the client establishes a (perhaps solo) 401(k) plan under the new company and rolls qualified funds into it, perhaps the client could take a loan from the new 401(k) to obtain the funds to complete a rollover of some or all of the offset distribution.  For an offset distribution occurring in 2018, the client has until the extended due date of the client’s 2018 individual tax return to complete the rollover of the offset distribution.

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