Individual/Solo 401(k) Plan-Opening & Funding for tax year 2023
I have a client that had self-employment income in 2023 and is currently on a 2023 extension so he has until 10/15/24 to file his 2023 return. Even though it is past the 4/15 the tax deadline, his tax preparer is telling him to setup a solo 401(k) for tax year 2023 so he can make tax-deductible 2023 employee and employer contributions. Can a solo 401(k) plan be setup and 2023 solo 401(k) contributions be made into that new account up until 10/15/24 if a client goes on extension? Is this an IRS rule or TPA rule?
One TPA is telling me 4/15/24 was the hard deadline to open a plan for 2023 and make 2023 employee salary deferrals.
Another TPA is telling me the plan would need to have been open by 12/31/23.
On a separate note, is a TPA required for recordkeeping for Solo 401(k) plans. Or if the owner is the only employee can the plan be setup and maintained without a TPA for recordkeeping?
Permalink Submitted by Alan - IRA critic on Fri, 2024-04-19 16:35
As a result of changes made by the Secure Act a sole proprietorship can establish their first solo K up to the tax due date plus extensions if an extension was filed by 4/15/2024. However, Sec 317 of Secure states that employee contributions (elective deferrals) must be made by the tax due date WITHOUT regard to extensions.
Per a noted consultant: “There has been some uncertainty as to whether one-participant 401(k) plans could be established after year-end and it appears these plans can still be funded with the employer contribution up to the employer’s tax filing deadline plus extensions, but Section 317 makes it clear that with regard to employee contributions the plan must be established and funded by the individual filing deadline. For example, a business owner can now wait until April 1, 2024, to establish and make 2023 contributions to a one-participant 401(k).”
Therefore, the first TPA is correct. But if an extension was filed by 4/15, the employer contribution (but not elective deferrals aka employee contributions) could still be made.
I don’t recommend that the sole prop serve as their own plan administrator unless they have considerable experience. A professional administrator should be used.