Minna coordinates Sense Financial's communication efforts towards educating clients about the Self Directed IRA and Solo 401k. She enjoys the opportunity to work with clients from various backgrounds, experiences, and goals. She strives to ensure that each client’s goals are met through the products Sense Financial offers.
The employee/elective deferral contribution should be deposited into the Solo 401k within 7 business days of processing. If the employee contribution is made within that time frame, it is still counted as timely under the Department of Labor's safe harbor rule for employee contributions.
If the 7-business day deadline is not met, the employee contribution may not be counted as timely. The maximum deadline to deposit the employee contribution is the 15th business day of the following month. Although it is possible to deposit the contribution by that date, it does not fall under the Department of Labor’s safe harbor rules.
If you exceed the above deadline, this may constitute an operational mistake and potentially, a prohibited transaction.
Your plan documents note the following language:
Salary deferrals are deposited in the trust as soon as reasonably possible, following guidelines issued by the Department of Labor. (Summary Plan Description)
Elective Deferrals will be remitted by the Employer to the Trustee or custodian on the earliest date that they can reasonably be segregated from the Employer's assets, but in no event later than the 15th business day of the month following the month in which the Participant contributions are withheld or received by the Employer, unless under the regulations an extension of up to 10 business days is granted by the Secretary of Labor with respect to Elective Deferrals received or withheld in a single month.
In the case of a small plan (less than 100) participants the Department of Labor has provided a safe harbor option for depositing Participant contributions within 7 business days after the money is received or withheld from payroll. This seven day rule was finalized as of January 14, 2010. (Defined Contribution Plan Document)
Not following the above language is considered an operational mistake, and it may be possible to correct the operational mistake under the IRS's Employee Plans Compliance Resolution System (EPCRS).
Not following the above language may also give rise to a prohibited transaction, which cannot be corrected under EPCRS. Instead, it may be possible to correct the prohibited transaction under the DOL’s Voluntary Fiduciary Correction Program (VFCP).
For more information on these programs, visit the IRS’s pages:
The Automatic Enrollment feature can be added to your Solo 401k plan, allowing you to receive a $1500 tax credit over 3 years.
What it is
The Automatic Enrollment feature allows employers to contribute a default portion (e.g. 3%) of an employee’s wages to the retirement plan, on the employee’s behalf.
With the Solo 401k, you are typically both the employer and the employee. You may also have a spouse as an additional employee. By adding the automatic enrollment feature, you are setting a default contribution to be made for each employee in the plan.
With this feature, the IRS allows you, as the employer, to claim a $1500 tax credit over 3 years- a $500 dollar-for-dollar tax reduction per year if you maintain the arrangement over 3 years.
Applies to the employee contribution
With Automatic Enrollment, the employer must make at least a 3% salary deferral contribution for each employee. This is typically done as a pre-tax employee contribution.
However, the employee can elect to do otherwise by completing an election form within a certain time frame. The employee can elect to:
Make a portion or all of the contribution as Roth
Make a greater contribution than the 3%
Make a lesser contribution than the 3%
Not make the contribution at all
To make this election, the employee must complete the Deferral Election form. This form is located in our Miscellaneous Forms section:
The completed Deferral Election form is submitted to the plan administrator. Typically, this is you- you are the employee, employer, and the plan administrator.
The employee must complete the Deferral Election Form and then typically, also keep the form as plan administrator. This form must be completed within 60 days of receiving the notice.
Note that the limits for the employee salary deferral contribution still apply to this arrangement:
The employee salary deferral contribution limits still apply. For example, the limit for 2024 is $23,000.
The employee salary deferral contribution, as the employer profit sharing contribution, is based on your compensation from the adopting business.
The employee salary deferral contribution limits are per person, not per plan. If you have already reached the limit through another employer-sponsored plan for the year, you will not be able to make this contribution to this plan.
All employee elective deferral contributions, including those under this arrangement, cannot be withdrawn from the plan unless you are 59.5 or older.
Requirements for the arrangement
The Automatic Enrollment feature must be for the full plan year. It has two requirements:
Uniformity requirement: The arrangement must uniformly apply to all employees after giving them the required notice.
Notice requirement: A notice of the Automatic Enrollment must be given to all employees within a reasonable period of time, e.g. 30 days before the arrangement is adopted. Notices must also be given to all employees in subsequent years.
Your first notice is included in your set of plan documents (“Automatic Enrollment Notice”). Please review the notice carefully.
Claiming the tax credit
The $1500 tax credit is given over 3 years at $500 per year. You must maintain the Automatic Enrollment feature for all 3 years to claim the tax credit. The tax credit is a dollar-for-dollar reduction (vs. a deductible expense).
To claim the credit, you must file Form 8881 for the first year Automatic Enrollment was included in your plan:
See the section for Part II. Small Employer Auto-Enrollment Credit
You are responsible for this filing. Please make sure to file this in a timely manner.
What to do
Review the Automatic Enrollment Notice carefully
You are responsible for the administration of this arrangement. It is important that you are aware of your responsibilities under this arrangement.
Distribute the notice to all employees of the adopting business of your plan on an annual basis
Contribute to the plan per the default employee contribution or complete/keep the Deferral Election form, if doing otherwise
You must actually make the employee contribution(s) as stated in your arrangement. Or if doing otherwise, you must complete and keep the Deferral Election form to document the change.
Did you know that you are the fiduciary of your Solo 401k?
In addition to being a participant in the plan, administering the plan as plan administrator, directing the plan as trustee, you are also the fiduciary.
This means that you are responsible for doing the following, as noted by the US Department of Labor (DOL):
Acting solely in the interest of the participants and their beneficiaries;
Acting for the exclusive purpose of providing benefits to workers participating in the plan and their beneficiaries;
Paying only reasonable plan expenses;
Carrying out duties with the care, skill, prudence, and diligence of a prudent person familiar with such matters;
Following the plan documents; and
Diversifying plan investments
With the benefits of your Solo 401k comes responsibilities. To equip yourself for your fiduciary responsibilities, do the following:
Read your plan documents
Review the set of plan documents that was sent to you by Sense Financial.
The Defined Contribution Adoption Agreement is the central document of your set. Take a few minutes to read through it.
The Summary Plan Description takes the selections from the Defined Contribution Adoption Agreement and spells them out in plain language, in a question and answer format.
Read and watch the resources on the client portal
The client portal is your go-to resource, available at all times.
The Knowledge Base is a great section to read, look up topics via search, and learn. Our videos are also available in the Education section of the client portal.
Make sure you are subscribed to Sense Financial's emails
Most importantly, our compliance emails. We regularly send out announcements, reminders, and updates related to keeping your plan in compliance.
List quoted from the US Department of Labor (DOL) resource below:
The mega backdoor Roth strategy is a way to get more Roth funds into your retirement account. Roth funds are taxed initially but grow tax-free.
The mega backdoor Roth strategy consists of:
Making after-tax contributions to the Solo 401k, and
Converting those after-tax contributions to Roth within the Solo 401k, and
Keeping those Roth funds in the Solo 401k for checkbook-control investing or rolling over the funds into a Roth IRA
The Mega Backdoor Roth strategy offers an alternative to contributing to a Roth IRA directly, which is limited to $7,000 per year by the IRS. Many individuals also do not qualify for a Roth IRA due to their high earnings.
Your Solo 401k with Sense Financial already includes the features which allow you to utilize the mega backdoor Roth strategy.
How it works
Open separate accounts for your Solo 401k to house your after-tax contributions and Roth funds, if you do not have these already
From a banking standpoint, these separate accounts will be identical. Both are in the name of your 401k and using the EIN of your 401k. However, these accounts are established to keep the funds separate from each other and to assist you in your accounting of each type of fund within your 401k. You can assign nicknames to the separate accounts online in order to differentiate them.
Calculate the after-tax contribution based on your self-employment business earnings
Make the after-tax contribution into the 401k account for after-tax contributions
Once that after-tax contribution is in your 401k, immediately convert the funds to Roth and move those funds to the Roth account
Note that the growth on the after-tax contribution is taxable, so you will want to convert the after-tax contribution to Roth immediately after the contribution is made.
Keep those funds within the Roth account of your Solo 401k for checkbook-control investing or roll those funds over to a Roth IRA
The following year, file a 1099-R to document the conversion
How it should be reflected on a 1099-R
In this case, the 1099-R should document the conversion of the after-tax contribution to Roth within your 401k. The Payer is your 401k trust, which is issuing the 1099-R to you, the Recipient.
Payer: your 401k trust
Payer TIN: the EIN of your 401k trust (not the EIN of your adopting business)
Recipient TIN: your SSN
Recipient: you, as an individual
Box 1: Gross distribution: amount that was converted to Roth
Box 2a: Taxable amount: 0.00 if the after-tax funds were converted to Roth immediately. The taxable amount would be 0.00 since the after-tax contribution was not originally claimed as a deduction and was converted to Roth immediately. If the after-tax contribution was not converted to Roth immediately, the growth amount is taxable and should be entered here.
Box 5: Employee contributions/Designated Roth contributions or insurance premiums: amount of the original after-tax contribution. If you converted the after-tax contribution to Roth immediately after making the contribution, this should be the same amount as in Box 1
Box 7: Distribution code: G which indicates a direct rollover (from after-tax to Roth) within the plan, your 401k
When the 1099-R should be filed
The 1099-R is filed in the year following the year in which the Roth conversion was performed (e.g. the 1099-R for 2022 is filed in 2023). There are two deadlines for the 1099-R:
The Payee/recipient copy must be received by January 31st
The electronic copy must be filed with the IRS by March 31st
You are responsible for the filing of the 1099-R by both deadlines.
The Solo 401k allows you to contribute to your plan in two ways- as employee and employer. Within the category of employee contribution, there are three types:
Pre-tax
Roth
Voluntary After-tax
Defining the three types of employee contributions
A pre-tax employee contribution is taken from compensation earned and reduces the taxable income. If you made a pre-tax employee contribution, you would deduct the amount of that contribution on your tax return.
A Roth employee contribution is taken from compensation earned and does not reduce the taxable income. If you made a Roth employee contribution, you would pay taxes at the time of the contribution.
A voluntary after-tax employee contribution is taken from compensation earned and does not reduce the taxable income. If you made a voluntary after-tax employee contribution, you would pay taxes at the time of the contribution.
What are the differences between them?
There are two main differences between these three types of employee contributions- how the distribution is taxed and the maximum limit of the contribution.
How the distribution is taxed
When a pre-tax employee contribution is distributed, both the principal amount of the contribution and its growth is taxed at the current rate at the time of distribution.
A Roth employee contribution and an after-tax contribution is a qualified distribution when you are age 59.5 and older and the funds have been in the 401k for 5 years or longer.
With both a Roth employee contribution and an after-tax contribution, the principal contribution amount is not taxed upon distribution. However, the two contributions differ in whether the growth is taxed.
When a Roth employee contribution is distributed, both the principal contribution amount and the growth are distributed tax-free.
When an after-tax employee contribution is distributed, only the principal contribution amount is distributed tax-free. The growth is taxable and must be taxed at the current rate at the time of distribution.
Maximum limit of the contribution(s)
Both a pre-tax and a Roth employee contribution is subject to a combined maximum limit: $23,000 plus $7,500 catchup (for those age 50 and above) for 2024. In other words, you can make pre-tax contributions, Roth contributions, or a combination of both, but the combined total cannot exceed the maximum limit for the year.
An after-tax employee contribution is subject to a different maximum limit: $69,000 for 2024.
Making an after-tax contribution
Your Solo 401k plan now includes the ability to make after-tax contributions. All three types of employee contributions are documented in the Post PPA version of your Adoption Agreement.
If making an after-tax contribution, you will first want to establish a separate account for the contribution(s). Because an after-tax contribution is different from a Roth contribution, the after-tax contribution should not be kept in the same account as a Roth contribution.
As an after-tax contribution, this would not be processed through payroll
The after-tax contribution would be made from your personal account, after receiving compensation from the adopting business
Once the after-tax contribution is made to its own account, the funds can then be converted to Roth within your 401k as part of a mega backdoor Roth strategy
Due to the tax consequences of the mega backdoor Roth strategy, you will want to check with your CPA first before undertaking the strategy.
The IRS has released Form 8915-E and 8915-F for the reporting of CARES Act distribution(s) that were taken in 2020, their repayment, or their inclusion in income.
If you took a CARES Act distribution in 2020, note which form(s) would apply to you:
Form 8915-E is used to report:
If you took a CARES Act distribution in 2020
Form 8915-F is used to report:
Your income in 2021 if you took a CARES Act distribution in 2020 and have been including in your income in equal amounts over 3 years and that 3-year period has not yet lapsed
Your repayments of a CARES Act distribution, if repaying the distribution
Note that repayment of the CARES Act distribution can be done over 3 years, starting with the day after the distribution was received. Repayment(s) can occur through multiple payments or one lump sum payment by the end of those 3 years. If the entire CARES Act distribution is paid back within that time, the distribution will not be taxed.
You will want to request your CPA’s assistance in completing the appropriate form for your situation.
More information on these two forms can also be found at:
As the year comes to a close, we'd like to remind you to plan for your contributions to your Solo 401k. In this article, we'll discuss the following questions:
How do I calculate my contributions for this year?
How do I actually make contributions to my Solo 401k?
When is the deadline to make contributions?
How do I calculate my contributions for this year?
Solo 401k contributions are comprised of two components:
On the employee side – employee salary elective deferral
On the employer or business-owner side – employer profit sharing
Contributions can only be made from the business earnings of the adopting business
The Contributions Calculator explains the maximum employee and employer contributions that can be made to the Solo 401k
Always check the totals with your CPA
Starting in 2025, the SECURE Act 2.0 provides for "super catch-up contributions" for those turning 60-63:
How do I actually make contributions to my Solo 401k?
The way to make contributions to your Solo 401k depends on the type of adopting business.
If your Solo 401k is sponsored by a corporation:
Employee salary elective deferrals must be processed through payroll. Speak with your payroll provider to request this.
If payroll has already been processed for the year, the only option is to amend the Q4 reports to reflect the contributions to the 401k. Keep in mind that contributions will affect the taxes paid as well as other numbers. Speak with your payroll provider about making this correction.
If your Solo 401k is sponsored by another type of business (e.g. sole proprietorship, LLC), all contributions must come from your adopting business's bank account.
All contributions must be elected and documented via the appropriate form.
There are two forms, depending on the type of contribution made.
All elections to contribute must be made before December 31st of the year. This means the date on your contributions form must be before December 31st.
As Plan Administrator, keep the completed contribution forms as part of your record-keeping for the plan.
Issue a check payable to your 401k trust (refer to the IRS letter for the exact spelling)
As Plan Administrator of your 401k, you are responsible for tracking all of the funds and assets of your 401k. The monies in your 401k should be kept accounted for separately.
Types of monies include:
Rollover(s)
Employee salary deferral contribution(s)
Employer profit sharing contribution(s)
Roth contributions
etc.
You will need to establish a clear accounting method to keep track of each type. Accounting will include the incoming amount(s) as well as the transactions and investments for each. The format for tracking and accounting is up to you. You can use any type of accounting software, such as:
