Excess Solo 401k Contribution

Submitted by Micah Porter on Mon, 2023-03-13 14:09

A client recently changed accountants, and let the accountant know she had a solo 401k plan under her LLC (balance is well below $250k). She had been making monthly contributions to the solo 401k, and total contributions were $16,500 for 2022. In spite of being aware of that, the accountant;

* Switched to an S-Corp election for her, backdated to 1/1/2022
* Had her pay herself no salary, eliminating her ability to make salary deferrals or profit sharing contributions to the 401k
* Did not reduce her income by the amount of the deferrals – so no tax benefit was claimed.

I was planning on having the custodian do a removal of excess for 2022, close the solo 401k under her LLC, and open a solo 401k under the S-Corp for 2023. My concern is the custodian will generate a 1099-R and the IRS will treat the removed amount as taxable and my secondary concern is that there may be some other pitfall of which I’m unaware.

Any suggestions/insight would be greatly appreciated.

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Permalink Submitted by Alan - IRA critic on Tue, 2023-03-14 01:06

This is not a tax forum, but she is required to pay herself a reasonable salary, certainly not 0. Further, I question whether the S Corp filing can be backdated over a year to 1/1/2022. Therefore, perhaps the IRS will not even approve S Corp status for 2022 and she has no excess 401k contribution?

Permalink Submitted by William Tuttle on Tue, 2023-03-14 02:24

An employer can not adopt a 401k plan for one (1) year after terminating a previous 401k plan.
The sole proprietorship and the S-Corp will be a controlled group. There is no need to terminate the 401k plan.
E-Trade, Schwab, TD Ameritrade and Vanguard one-participant 401k plan documents by default include all affiliated employers.
All that is necessary with Fidelity, is to amend the plan to add the affiliated employer.