Solo 401k Misfiled – How to handle?

Submitted by Jeffrey Soffen on Wed, 2023-11-15 14:26

Hi!

I misfiled a Solo 401k with Schwab. I thought I was a 1099 employee, but I am a K-1. I now need to get the IRS to send Schwab a letter of permission to release the funds. I was directed by Schwab to this website (https://www.irs.gov/retirement-plans/correcting-plan-errors-fix-plan-errors) to fill out a Letter of Instruction and then include the Date of Contribution, Amount of Principle, and How to Pay Back. However, after looking into this further, to submit an explanation to the IRS, I will need to create an account at pay.gov. From here, it looks like I will need to submit form 8950. This form requires a minimum fee of $1,500. Seems really high and can not believe they charge this. I tried to see if there was a way I could get this waived, however I don’t think my plan qualifies for the orphan plan, which is mentioned here (https://www.irs.gov/retirement-plans/voluntary-correction-program-fees).

What is the best way to resolve this? I made a stupid mistake and I can’t figure out how to fix this.

Help!



Submitted by William Tuttle on Thu, 2023-11-16 00:00

  • Form 1099-NEC income is Non-Employee Compensation. Such income is business income. The recipient is not an employee, but rather a business. If this business income is to a sole proprietor, their self-employed earned income (net earnings from self-employment) = business profit – 1/2 SE tax. This would be eligible for a one-participant 401k.
  • Is the “K-1” a Form K-1(1065) from a Partnership or a Schedule K -1(Form 1120-S) from an S-Corp.
  • If it is the former, this is also self-employed earned income and would be eligible for a one-participant 401k.
  • If it is the latter, these distributions are not compensation and would not be eligible for a one-participant 401k.
  • Self-employed earned income from either a sole proprietorship or a partnership would be eligible for a one-participant 401k.
  • If this is from an S-Corp, you were not eligible to adopt a 401k plan in the first place. I think Schwab is incorrect in the case.
    • I do not think a VCP is required, because there is no valid plan. This was a mistake of fact and Schwab should treat it as such.
    • I would call Schwab back and ask for a supervisor.
    • If that does not resolve the issue. I would go to benefitslink.com. It is a forum for professional third party administrators (TPAs). I would join and post in the 401k subject forum.
    • While it is a forum for professionals, they quite likely could provide the best solution to this problem.


    Submitted by David Mertz on Thu, 2023-11-16 02:05

    If it’s a partnership, the solo 401(k) plan would have to be established under the partnership, not the individual, and there could be no non-partner employees that the plan would have to cover.



    Submitted by William Tuttle on Thu, 2023-11-16 02:47

    Lost the forest for the trees. I’m still not convinced a VCP filing is required for an ineligible individual who mistakenly adopted and contributed to a one-participant 401k. That’s why I suggested posting to benefitslink.com.



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