Can you provide guidance on what I'm required to do on the tax/CPA side of things? What should I submit to my accountant?
IMPORTANT: Please note that we are not qualified to provide tax, legal or investment advice. This information is intended as general guidance only. You should always consult with an experienced tax professional regarding your personal tax situation.
For the Solo 401k plan itself, you may or may not need to submit the 5500-EZ form. Please review the annual filing requirements HERE.
As plan administrator of your Solo 401k, it is your responsibility to maintain the recordkeeping of the plan. This includes the contributions, distributions, investments, etc. All recordkeeping forms are located under the Maintenance tab within “Miscellaneous Forms.”
For your personal taxes, you will need to report contributions made to the plan:
- Employee elective deferral contributions are reported on the first page of your personal tax return (Form 1040). Remember: if your plan is sponsored by a corporation, you need to process contributions through the payroll. All contributions will need to be reflected on the paycheck as well as on Form W2. See HERE for details.
- Employer profit sharing contributions are reported on the corporate tax return. If your plan is sponsored by a sole proprietorship or single-member LLC, this contribution needs to be reported on your Schedule C.
Other things that would affect your personal taxes are:
- Roth conversion
- Defaulted loan*
* The Solo 401k loan is in default when the cure period has passed. The loan is then considered as a distribution and is taxable and reportable as income.
All of the above are taxable events. If you perform any of the above, you will need to report it through Form 1099-R. As the administrator of your Solo 401k, you are responsible for filing Form 1099R on behalf of your plan. If you would like assistance with generating a 1099-R, please contact us at the beginning of January of the following year to request this service.
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 review of the Form 5500-EZ is advised to ensure it is properly prepared and does not unnecessarily raise red flags to the DOL (Department of Labor) and/or IRS (Internal Revenue Service). 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:
- Use the correct plan name and plan sponsor name (as well as the correct employer identification number “EIN”). This might seem a strange recommendation, but reportedly there are a lot of missteps in this regard. Often, it is just an error; other times, changes occur as the result of the change in sponsoring entity that are not recognized and/or are not appropriately addressed.
- Obtain appropriate proof of the Form 5500-EZ filing (and the filing of the Form 5558 extension form). These steps are often overlooked by plan sponsors. It is easy to obtain such proofs in order to avoid an argument with the government over the imposition of potentially significant fines for not filing or for filing late. This is especially important since the penalty was recently increased to $250 per day (not to exceed $150,000)!
- If you failed to file a Form 5500 or will file late, quick participation in the DOL’s Delinquent Filer Voluntary Compliance Program (“DFVCP”) should be explored.
- The DOL and IRS continuously state that where an answer on the Form 5500-EZ is described as “other,” it will have a tendency to garner their attention. Accordingly, effort should be made to avoid using that response. As an example, we have seen recently loan interest being reported as “other,” when in fact the instructions specifically provide a place to report accrued, but unpaid interest on participant loans.
In summary, 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.
Another deadline is coming which may affect your SFS Solo 401k!
If there is a distribution or a Roth conversion within your Solo 401k plan in 2018, Form 1099-R will need to be issued from your Solo 401k by January 31, 2019. 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:
Our team can assist with creating 1099-R forms. If you would like us to help create a Form 1099-R for your Solo 401k plan, please let us know by Monday, January 14, 2018. 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. You can locate these forms at the link above. Send your documents to firstname.lastname@example.org no later than January 14th, 2019.
If I made a mistake on my 5500-EZ, how can I file an amended form to correct the mistake?
On the amended form 5500-EZ, check the box A(2) for an amended return to correct errors and/or omissions. You can then submit it in the same way as the original was submitted.
If I file Form 5500-EZ now, does that obligate me to file subsequent 5500-EZ forms for the following years even if the total plan assets are below 250k?
No. Form 5500-EZ is required only if the total value of the 401k plan is $250,000 or above by the end of year.
Filing the 5500-EZ is not required if the total plan assets are below $250,000 by the end of the year, even if the form has been filed for the previous year.
As noted in the IRS instructions for Form 5500-EZ:
You do not have to file Form 5500-EZ for the 2016 plan year for a one-participant plan if the total of the plan's assets and the assets of all other one-participant plans maintained by the employer at the end of the 2016 plan year does not exceed $250,000, unless 2016 is the final plan year of the plan.
Do I need to get a tax ID from a contractor working on a property in my 401k so that I can file and submit 1099 to the IRS?
According to the IRS if you pay independent contractors, you have to file Form 1099-MISC, Miscellaneous Income, to report payments for services performed for your trade or business. 401k is not considered your trade or business but we suggest that you confirm with your CPA regarding filing requirements.
IMPORTANT: Before performing a Roth conversion, please make sure to educate yourself on the mechanics and consequences of Roth conversions. This is a taxable event. We always recommend that clients speak with their accountant prior to performing a Roth conversion in order to understand the tax consequences.
If you would like to perform a Roth conversion, you will need to do the following:
- Complete the In Plan Roth Conversion form, located HERE under Miscellaneous Forms.
As Plan Administrator, you will need to keep the original as part of your recordkeeping.
- Report the Roth conversion through Form 1099-R. The Roth conversion will be included as part of this year's taxable income.
If you would like us to assist you in creating a 1099-R, please contact us at the beginning of the following year to request this service. We will need a copy of your completed In Plan Roth Conversion form in order to have a 1099-R issued by your Solo 401k.
Note that you are not able to rollover funds from your previous pre-tax account(s) directly into the Roth bracket. If you decide to do the conversion, you will first have to move those funds into the pre-tax portion of your Solo 401k, and then do the conversion and move the funds into the Roth.
Finally, we do recommend keeping the pre-tax and Roth funds separate by opening two separate bank accounts. This is for ease of accounting.
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.
Last December, my accountant grossly miscalculated my tax liability estimate, which led me to believe that a Roth conversion could be made with a manageable tax impact. Later, when she prepared my tax returns in April, I discovered that my tax liability was actually much higher, and that the tax impact of the Roth conversion was too great to make it worthwhile. Can the Roth conversion can be reversed through timely recharacterization within my Solo 401k plan?
No. You cannot undo the Roth conversion.
The "Participant's Election" section of the In-plan Roth Conversion Amendment states that the in-plan Roth conversion is irreversible and cannot be undone or recharacterized in any manner. To not follow the terms of the plan (as stated in the amendment) would be an operational failure of the plan.
The Internal Revenue Bulletin: 2010-51 published December 20, 2010 (also listed as Notice 2010-84) provides Guidance on In-Plan Roth Rollovers:
In the Question/Answer section, it states the following:
Q-6. If a participant elects an in-plan Roth rollover, can he or she later unwind the in-plan Roth rollover, as can be done with rollovers to Roth IRAs?
A-6. No. The recharacterization rule in § 408A(d)(6) applies only to contributions to IRAs.
There is no way to reverse the Roth conversion. You will have to declare that as your taxable income and pay the taxes. Please consult with your CPA for details.