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Reporting Requirements

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

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.

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.

Solo 401k and personal taxes

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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?

Answer:

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
  • Distribution
  • 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.

Filing Form 5500-EZ if the value goes down

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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?

Answer:

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.

Filing a 1099 for a contractor working on a property owned by my 401k

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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?

Answer:

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.

Performing a Roth conversion

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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.

For information on Roth conversions, we have several articles located in our Knowledge Base regarding the Roth; please see HERE and HERE.

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.

Recharacterization of Roth conversion

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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?

Answer:

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:

https://www.irs.gov/irb/2010-51_IRB/ar11.html

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.

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