Solo 401K Question

Submitted by Kevin O'Hearn on Thu, 2023-05-18 23:11

Hello,

A owner only business (no employees) has a Solo 401k. They made an excess employer profit sharing contribution for the prior year. I am finding conflicting info on how this should be corrected. My questions are:

1. What is the process for correcting this?

2. Can they remove the excess by the business’ tax filing deadline, plus extensions to avoid penalties?

3. I have seen info that says they must leave the excess in the account, carry over the excess, and deduct in future years. Is this correct?

4. If carry over is available, is there a 10% penalty if this method is used?

Thanks!



Submitted by William Tuttle on Fri, 2023-05-19 03:59

  1. It depends on whether the excess amount is during the tax year or in the following year by the tax filing deadline including extensions.
  1. If it is the latter, the deduction can be set to the allowed amount. Any additional amount can then be allocated to the following year, by deducting it for that year. Then there is no excess contribution.
  2. If it is the former, it is an excess contribution and the process in 4. must be followed.
  • Highly unlikely, unless the reason meets a very specific IRS criteria for a “mistake of fact.” This almost never applies to a one-participant 401k.
  • Yes, that is correct.
  • The following steps are required for an excess contribution. This covered on IRS Publication 560, pages 23 & 24.
    1. Only the allowed amount can be deducted for the tax year.
    2. Form 5330 must be filed and with a 10% excise tax due.
    3. The excise contribution balance will be subject to Form 5330 filing with a 10% excise tax until reconciled.
    4. An excess contribution can be reconciled by:
    1. reducing the following year’s employer contributions belowed the allowed amount by the excess contribution balance.
    2. A deduction will be taken for the total of new contributions and the excess contribution balance.
    3. A final Form 5530 will be filed reconciling the excess contribution balance.


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