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Possible extensions for 5500-EZ filing

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You may be able to obtain a possible extension for filing Form 5500-EZ, but extensions must be obtained before the filing due date. If an extension is obtained, you would mark the appropriate box on Form 5500-EZ, Part I, B.

The due date of Form 5500-EZ filing is:

  • The last day of the 7th calendar month after the plan year end
  • This is July 31st, if the plan year end is December 31st

Possible extensions to file Form 5500-EZ include:

Form 5558

You can file for a one-time extension of the Form 5500-EZ deadline by filing Form 5558.

To be granted an extension:

  • Form 5558 must be filed by the Form 5500-EZ deadline
  • Form 5558 is for a one-time extension
  • The extension is up to the 15th day of the 3rd month after the normal Form 5500-EZ filing deadline

Form 5558 instructions and information can be found on the IRS website:

https://www.irs.gov/forms-pubs/about-form-5558

Federal income tax return extension

You may also be granted an extension of the Form 5500-EZ deadline if your adopting business has been granted an extension of its federal income tax return, to a date later than the normal Form 5500-EZ deadline.

This extension is automatically granted if all of the following conditions are met:

  • Your Solo 401k plan year and your adopting business’s tax year are the same, and
  • Your adopting business has been granted an extension of its federal income tax return, to a date later than the normal Form 5500-EZ deadline, and
  • A copy of the application for the extension of its federal income tax return is retained with your Solo 401k plan records

To utilize this extension, check “Automatic extension" in Part I, B of Form 5500-EZ.

Other special extensions announced by the IRS

According to the IRS:

The IRS may announce special extensions of time under certain circumstances, such as extensions for Presidentially-declared disasters or for service in, or in support of, the Armed Forces of the United States in a combat zone. If you are relying on one of these announced special extensions, check the “special extension” box on the Form 5500-EZ, Part I, line B, and enter a description of the announced authority for the extension.

Rolling funds out of the Solo 401k

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Rolling funds out of the Solo 401k is called an “in-service distribution” when the Solo 401k plan and its adopting business are still active.

Most clients do not want to roll funds out of the Solo 401k because of its checkbook control and ability to invest in a wide range of investments. However, there may be certain cases when a client wishes to roll funds out of the Solo 401k.

The ability to take an in-service distribution from the Solo 401k is based on:

  • The type of funds, and
  • Certain requirements
Type of fund in the Solo 401kCan you roll it out of the Solo 401k?
Rollover fundsYes, at any time
Voluntary after-tax contribution fundsYes, at any time
Pre-tax elective deferral/employee contribution fundsYes, if you have attained age 59.5
Roth elective deferral/employee contribution fundsYes, if you have attained age 59.5 and after a 5-year taxable period (beginning with the taxable year the Roth contribution was made)
Non-elective/employer contribution fundsYes, if you have attained age 21
In-plan Roth rollover funds (e.g. from an in-plan Roth conversion)Yes, after a 5-year taxable period (beginning with the taxable year the Roth conversion was performed

An in-service distribution can be rolled into another retirement account. To check which types of retirement accounts can receive funds from the Solo 401k, see the IRS rollover chart below:

https://www.irs.gov/pub/irs-tege/rollover_chart.pdf

Part-time employees and your Solo 401k

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If you have part-time employee(s) that meet the following criteria, you will be ineligible for your Solo 401k per the SECURE Act:

  • At least 500 hours per year, and
  • For 2 or 3 consecutive years, starting from January 1, 2021

The above criteria does not apply to:

  • You
  • Your spouse, if employed by the business
  • Independent contractors (1099s), if paid by the business

However, if you have part-time employee(s) in your businesses that meet the above criteria, they will become eligible for the plan in 2024 or 2025. And this renders you ineligible for your Solo 401k, since it is designed for the owners only.

If you have any part-time employee(s), please do the following:

  • Check their hours

Starting from January 1, 2021, have they worked at least 500 hours for 2 or 3 consecutive years? 

Part-time employee(s) who have worked at least 500 hours for 3 consecutive years become eligible for the plan in 2024. Those who have worked at least 500 hours for 2 consecutive years become eligible for the plan in 2025. 

If they have worked and will remain under 500 hours, you remain eligible for your Solo 401k. But make sure that your plan documents have the service requirement described below.

  • Check your plan documents

If you have any part-time employee(s), you should have a service requirement checked in your plan documents.

Review your Post PPA “Defined Contribution Adoption Agreement”, page 5. C4.b should be checked as below:

  • Notify Sense Financial Services to update or close the plan, if needed

If your part-time employee(s) have worked and will remain under 500 hours, you are still eligible for your plan, but your plan documents should have C.4.b checked as above to exclude the part-time employee(s).

If your part-time employee(s) have worked at least 500 hours for 2-3 consecutive years, you will need to close your plan by 2024. Notify Sense Financial to do so immediately.

For more information on terminating the plan:

How do I terminate my Solo 401k plan?

Late 5500-EZ filing

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What if I filed Form 5500-EZ late?

Although the IRS has increased the penalties for late filing of Form 5500-EZ, they also offer two options for penalty relief.

Form 5500-EZ is an annual informational form for the Solo 401k, filed with the IRS:

  • Form 5500-EZ is required for Solo 401k plans that are at least $250,000 in plan value as of the end of the plan year
  • Form 5500-EZ filing deadline is the last day of the 7th month after the end of the plan year. For most clients, this is July 31st.
  • Step-by-step instructions for filing Form 5500-EZ are on our website:
Form 5500-EZ Instructions
  • Late Form 5500-EZs are now subject to a penalty of $250 per day, up to $150,000, under the SECURE Act

If you are filing Form 5500-EZ after the deadline, the IRS has provided two possible options for late filing penalty relief:

Option 1: Late Filers Penalty Relief Program

https://www.irs.gov/retirement-plans/penalty-relief-program-for-form-5500-ez-late-filers

  • Late returns must still be prepared and submitted to the IRS
  • A fee of $500 must be submitted for each late return
  • If you received a penalty letter (CP 283 Notice), you are not eligible for this program

Option 2: Penalty Relief for Reasonable Cause

https://www.irs.gov/payments/penalty-relief-for-reasonable-cause

  • If you received a penalty letter and are found to have reasonable cause for filing late, you may be eligible for this program

For more information:

https://www.irs.gov/retirement-plans/form-5500-ez-delinquent-filing-penalty-relief-frequently-asked-questions

Your role as Solo 401k fiduciary

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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:

https://www.dol.gov/sites/dolgov/files/ebsa/about-ebsa/our-activities/resource-center/publications/automatic-enrollment-401k-plans-for-small-businesses.pdf

Mega backdoor Roth within the Solo 401k

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What it is

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.

Important deadlines

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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:

Contribution Basics

Form 1099-R:

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:

Forms to Administer Solo 401k Plan

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:

RMD Calculator

As the plan administrator it is your responsibility to withhold the taxes and report the distribution, learn more here:

Withholding 20% Tax on Distribution

Sponsor Reporting:

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.

Reporting CARES Act distributions and repayments

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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:

https://www.irs.gov/forms-pubs/about-form-8915-e

https://www.irs.gov/forms-pubs/about-form-8915-f-qualified-disaster-retirement-plan-distributions-and-repayments

Calculating plan assets

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I'm getting ready to file Form 5500-EZ and need help calculating the plan assets of my 401k. I used some of the funds for a down payment to purchase an investment property. The rest of the purchase price was financed using a hard money loan. My wife doesn't have any investments at this time, just some cash. How do I calculate the net plan assets?

Answer:

First, you must calculate the total plan assets. To do so, simply add up all assets plus cash for all participants. Please note that if the total plan assets exceed $250,000, you are required to file Form 5500-EZ.*

For properties owned by the 401k, the value of each property will need to be based on other properties in the area-  real estate comps, CMA, broker's price opinion or a third-party appraisal can be obtained.

Example:

Your plan owns a property valued at $220,000. There is $15,675 of cash in your checking account for the 401k. Your spouse  has $18,000 cash in her 401k account. There is a mortgage note against the property for the amount of $120,000.

Total plan assets will be calculated as:

+ $220,000.00 Value of the property
+ $15,675.78 Cash in your account
+ $18,000.13 Cash in spouse's account

Total plan assets: $253,675.91  (Note: since the total exceeds $250,000, you are required to file the 5500-EZ)*

- $119,841.09 Mortgage against the property (Total plan liabilities)
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Net plan assets:  $133,834.82

* Please see our detailed instructions on how to complete Form 5500-EZ below. On the form, you are required to enter a single number for total plan assets, then total plan liabilities, then net plan assets.

Annual Filing Requirement

 

How do I value real estate in my Solo 401k plan?

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My Solo 401k plan owns real estate property. How do I value that?

Answer:

The value of each property will need to be based on other properties in the area (real estate comps), or a third-party appraisal can be obtained.

Please note: if you are taking an in-kind distribution or in-kind conversion of the property (i.e. there is a taxable event), then you must use a licensed third party appraisal to determine the accurate value of the property.  The appraisal must be dated as close as possible to the taxable event.

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