When is the deadline to establish a Solo 401k and make contributions to it? And is the deadline affected if I have an extension on my tax filing?
It depends on the tax status of the adopting business of the plan.
The tax status determines the tax filing deadline
The tax filing deadline is the deadline to establish and contribute to the plan
Note, however, that if you have an extension for your tax filing deadline, this may or may not affect the deadline to establish and contribute to your plan.
Tax Status
Filing Deadline
Extended Deadline
S-Corporation (or LLC taxed as S-Corp)
March 15
September 15
Partnership (or LLC taxed as a partnership)
March 15
September 15
C-Corporation (or LLC taxed as C-Corp)
April 15
October 15
Sole Proprietorship (or LLC taxed as sole prop)
April 15
October 15
Tax filing deadlines and extensions
Establishment
The SECURE Act allows employers to establish a Solo 401k for the taxable year, after the taxable year is over, if the plan is established by the tax filing deadline for that taxable year.
This may or may not be affected by an extension, depending on the tax status of the adopting business of the Solo 401k:
Adopting businesses with tax status of a partnership or corporation can establish a Solo 401k by the business’s tax filing deadline, including extension
Adopting businesses with tax status of sole proprietorship can establish a Solo 401k by the business’s tax filing deadline, no extension (April 15)
Employer contribution
All adopting businesses can make employer contributions to the Solo 401k by the business’s tax filing deadline, including extension
Employee contribution
Adopting businesses with tax status of a partnership can make employee contributions to the Solo 401k by the business’s tax filing deadline, including extension
Adopting businesses with tax status of corporation can make employee contributions to the Solo 401k by the end of the taxable year because the employee contributions must be processed through payroll
Adopting businesses with tax status of sole proprietorship can make employee contributions to the Solo 401k by the business’s tax filing deadline, no extension (April 15)
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.
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.
Sense Financial can assist with the filing of the 1099-R by request only, provided that we receive your request by our deadline of the second Monday in January.
The following video gives an overview on calculating contributions:
Understanding contributions goes a long way in helping you feel prepared. Setting aside the time to read and watch the above is an easy first step.
2. Mark the deadline for your contributions on your calendar
Different factors affect the deadlines for your Solo 401k contributions. The deadline can differ based on the type of contribution you are making, the type of business you have, and the fiscal year of your business.
Make sure to mark the deadline(s) for these contributions on your calendar, so you have plenty of time to prepare and make them for this year.
3. Do some initial calculations
Your Solo 401k allows you to make different types of contributions- as employee and as employer.
The employee and employer contributions differ in how they are calculated. Factors such as: how much your business earnings/compensation for the year, your current age, and your participation in other employer-sponsored plans can affect the contribution amounts to your Solo 401k.
Start by grabbing a pencil and paper and input a few numbers to come up with some initial calculations:
Your CPA can confirm both your business earnings/compensation for the year, which serves as the basis for your contributions, and the contribution amounts you can make to your Solo 401k.
5. Prepare for your contributions
Solo 401k contributions must be documented and, depending on your type of business, processed a certain way.
Documentation
All contributions must be documented using our contribution forms. These forms document the election to make the contribution and must be dated by December 31st of the year for which the contribution is made. The completed and signed contribution form must be kept in your file as Plan Administrator of your Solo 401k.
If you have a corporation or an LLC with an S-corp election, you will need to notify your payroll provider of your planned Solo 401k employee contribution. Your Solo 401k employee contribution must be processed through payroll. This typically occurs before the end of December, and the payroll provider must be notified and given time to process your employee contribution.
As year-end is approaching, please note the following important upcoming deadlines:
Contributions Deadline:
Plan owners must formally elect to make contributions before December 31st. Depending on your business type, you may also be required to make employee elective deferral contributions before December 31st. We’ve put together a summary for you that answers common questions about contributions. In order to review this information, click on the link below:
If there is a distribution or a Roth conversion within your Solo 401k plan in 2023, Form 1099-R will need to be issued from your Solo 401k by January 31, 2023. Distributions and Roth conversions are taxable events and need to be reported to the IRS. You can find Form 1099-R on the client portal:
Sense Financial can assist with creating 1099-R forms. If you would like us to help create this form for your plan, please let us know by Tuesday, January 9, 2023.
We will need a copy of a completed In-Plan Roth conversion form and/or the completed Distribution form in order to prepare your 1099-R. These forms can be located at the link above. Send your documents to clients@sensefinancial.com no later than January 9th.
Deadline to receive Required Minimum Distribution (RMD):
Plan participants who turned 72 years old in 2023 are required to take their first required minimum distribution (RMD) before April 1, 2023.
To determine the amount of distribution you must take, please click on the RMD calculator below:
As the document sponsor of your Qualified Plan, we are preparing to submit our annual report to the IRS. The report will list all 401k plan sponsors using our documents.
If there has been any changes in your situation (e.g. change in the business type, address, addition of employees, etc.) please let us know by Monday, December 20th. Our goal is to provide you with the help and guidance needed to keep your plan in compliance. If you have any question, please don't hesitate to let us know.
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.
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.
Yes. All your contributions must come from your business profits. You should create a separate designated Roth account for ease of tracking your Roth balance and use the appropriate form to document your contributions. Forms can be accessed here:
The Solo 401k participant typically makes annual Solo 401k plan contribution when completing business tax return for the year. As a result, the Solo 401k participant can usually determine her IRC Sec. 404 deduction limits before making her Solo 401k contribution, thus preventing any excess Solo 401k contribution headaches.
10 Percent Penalty and Form 5330: When the Solo 401k participant contributes more than the allowable deduction for a given tax year, he is typically required to pay a 10 percent penalty on the over contribution amount also known as the excess nondeductible contribution amount pursuant to (IRC Sec. 4972). As such, this penalty amount must be reported to the IRS by the plan participant since he is the owner of the business by filing IRS Form 5330, Return of Excise Taxes Related to Employee Benefit Plans, and remit the penalty to the IRS. Please refer to IRC Sec. 404(a)(1)(E) as it details that the amount of the otherwise deductible contribution that exceeds the limitation for any given year shall be carried forward indefinitely and applied to subsequent years.
IMPORTANT: Even though excess nondeductible Solo 401k contributions may be returned to the Solo 401k employer under limited circumstances, the Solo 401k employer runs the risk of incurring substantially greater penalties by taking a reversion of plan contributions. The reversion penalty is typically as high as 50 percent depending on the circumstances pursuant to (IRC Sec. 4980).
First Determine Contribution Type
When removing excess contributions from a solo 401k plan, you first need to determine the type of contribution being removed. There are 2 (two) types of contributions that apply to a solo 401k plan.
Type 1 (one): Employee Elective Deferrals Contributions that exceed the annual limit
Type 2 (two): Employer Profit Sharing Contributions
The Rules Are Different for Each Contribution Type
The rules for removing the employee contributions vs the employer profit sharing contributionsare different and are discussed below.
Here is what the IRS code says regarding removing Employee Contributions
If the excess salary deferral is not returned on or before April 15 of the following year, the contributing participant must pay income tax on the deferral both in the year of deferral and in the year of distribution. The deferrals are not included as after-tax assets even though they have previously been included in income in the year of deferral (IRC Sec. 402(g)(1) and (Treas. Reg. 1.402(g)-1(e)(8)). The earnings on the excess will be taxed in the year of distribution. Any corrective distribution of less than the entire amount of the excess deferral plus income is treated as a pro rata distribution of excess deferrals and income (IRC Sec. 402(g)(2)(D), Treas. Reg.1.402(g)-1(e)(10)).
For the employer contributions (profit sharing), here is what the rules state:
They will need to remain in the solo 40k plan and treated as contributions in future years. However, a 10% penalty will need to be paid on the over contribution amount also known as the excess nondeductible contribution amount pursuant to (IRC Sec. 4972).
This penalty amount of 10% will need to be reported by the solo 401k owner by filing IRS Form 5330, Return of Excess Taxes Related to Employee Benefit Plans, and remit the penalty to the IRS.
Please refer to IRC Sec. 404(a)(1)(E) as it details that the amount of the otherwise deductible contribution that exceeds the limitation for any given year shall be carried forward indefinitely and applied to subsequent years.
