With a Checkbook Solo 401k account, plan owners have direct access to the account and can write a check to fund investments. But is it possible to obtain a credit card under the name of a Solo 401k plan? Find out in this Solo 401k Quick Tip video.
Form 5500-EZ for Solo 401k plans must be filed with the IRS by the last day of the 7th calendar month after the end of the plan year. For most of our clients, that date is July 31st (unless your plan year is different than the calendar year). Failure to file will result in severe penalties of $250 per day (not to exceed $150,000)!
We have updated our instructions which are located on the following page:
As of January 1, 2021 you can use the EFAST2 filing system to file IRS form 5500 series online. This includes an online filing of IRS form 5500-EZ. The IRS has released several helpful tutorial videos:
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?
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)
________________________________________________
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.
My Solo 401k plan owns real estate property. How do I value that?
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.
The IRS has released form 5500-EZ for 2021. We have updated our instructions which are located on the following page:
As of January 1, 2021 you can use the EFAST2 filing system to file IRS form 5500 series online. This includes an online filing of IRS form 5500-EZ. The IRS released several helpful tutorial videos:
What is Form 5500-EZ? Am I required to file it?
Form 5500-EZ is the filing requirement for Solo 401K plans with $250,000 or more in total plan assets. It is a simple informational return that is filed with the IRS. As the plan administrator, you are responsible for filing Form 5500-EZ once your plan reaches $250,000 in total plan assets.
Plans with assets totaling less than $250,000 are not required to file Form 5500-EZ.
For instructions on filing Form 5500-EZ, please visit:
The IRS Form 5500-EZ filing due date is July 31 for most plans (without extension). Accordingly, at this time of year, we see increased activity relative to Form 5500-EZ preparation and filing. Close and careful review of the Form 5500-EZ is advised to ensure it is properly prepared and does not unnecessarily raise red flags to the Department of Labor (DOL) and/or the Internal Revenue Service (IRS). The following is a short list of considerations and questions aimed at helping avoid government inquiry otherwise prompted by a “wrong” answer on the Form 5500-EZ. The bottom line is that it is critical to follow the Form 5500-EZ instructions and carefully review the entries in order to avoid triggering an investigation. Here are a few issues for your consideration:
In summary, a close review of the Form 5500-EZ will likely save time and money later. It is the plan sponsor who signs and submits the form under penalty of perjury; accordingly, the signer has a keen interest in ensuring the Form 5500-EZ is properly and accurately completed. It is better to discover and address those matters sooner rather than later.
As year-end is approaching, please note the following important upcoming deadlines:
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 2021, Form 1099-R will need to be issued from your Solo 401k by January 31, 2022. 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 Monday, January 10, 2022.
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 minna@sensefinancial.com no later than January 11th.
Plan participants who turned 72 years old in 2021 are required to take their first required minimum distribution (RMD) before April 1, 2022. If you reached 70 ½ in previous years, you have until December 31 to take your RMD for the year.
To determine the amount of distribution you must take, please click on the RMD calculator below:
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.
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).
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.
The rules for removing the employee contributions vs the employer profit sharing contributions are 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:
As Plan Administrator of your 401k, you are responsible for tracking the funds of your 401k. The monies in your 401k should be kept accounted for separately.
Types of monies include:
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: