Am I still covered by my self-employed 401(k)?

Question

A couple years ago I setup a self-employed 401(k) plan (solo 401(k)) to handle retirement contributions made from a side hustle that my spouse and I both participated in as a qualified joint venture. However, for 2018 the side hustle was dormant and we made nothing and won't be filing a schedule C. The solo 401(k) is still active although we've made no contributions to it this year.

Am I still considered "covered by a retirement plan" when considering the income limits on making deductible contributions to a traditional IRA? At what point am I no longer covered, when I terminate the solo 401(k) plan?

Answer 1

If it was me, I would work with the 401K provider and ask them if anything needs to be done formally. Also you can close the business. SBA link to closing a business. Once the business is closed the solo 401K does not exist, so you are not covered.

If you had this organized as an S-Corp this becomes a lot easier. You can simply fire yourself, and then rehire as the opportunity presents itself. You could have fired yourself on 12/31/2017 so you were not covered by a retirement plan for 2018.

Answer 2

From the IRS guidance on Are You Covered by an Employer's Retirement Plan? (bold emphasis mine):

You’re covered by an employer retirement plan for a tax year if your employer (or your spouse’s employer) has a:

• Defined contribution plan (profit-sharing, 401(k), stock bonus and money purchase pension plan) and any contributions or forfeitures were allocated to your account for the plan year ending with or within the tax year;

• IRA-based plan (SEP, SARSEP or SIMPLE IRA plan) and you had an amount contributed to your IRA for the plan year that ends with or within the tax year; or

• Defined benefit plan (pension plan that pays a retirement benefit spelled out in the plan) and you are eligible to participate for the plan year ending with or within the tax year.

Also, from General Instructions for Forms W-2 and W-3: Form W-2 Box 13 Retirement Plan Checkbox Decision Chart:

Type of Plan: Defined contribution plan (for example, a 401(k) or 403(b) plan, a Roth 401(k) or 403(b) account, but not a 457 plan)

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Conditions: Employee is eligible to contribute but does not elect to contribute any money in this tax year

Check Retirement Plan Box? No

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Conditions: Employee is eligible to contribute but does not elect to contribute any money in this tax year, but the employer does contribute funds

Check Retirement Plan Box? Yes

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Conditions: Employee contributed in past years but not during the current tax year under report

Check Retirement Plan Box? No (even if the account value grows due to gains in the investments)

So it looks like there's two conditions: (1) a defined plan in place AND (2) contributions made to one's account to be "covered by the plan". In my case the second condition wasn't met so I wouldn't be "covered by the plan" even though it's still open.