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 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.
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:
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 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:
In 2020 and prior years, Solo 401k plans could exclude part time W-2 employees who worked less than 1,000 hours from participating in a 401k plan. This all changes for both full-time employer 401k plans and owner-only Solo 401k plans starting on January 1, 2021.
The SECURE Act Stemming from the Setting Every Community Up for Retirement Enhancement Act (SECURE Act), Solo 401k plans will be impacted by the three years, part-time (500 but less than 999 hours) employee rule that will allow part-time employees to choose to make employee elective contributions to the company-sponsored 401k plan.
2020 and Prior Before the passage of the SECURE Act, non-owner W-2 employees (common law employees) who worked less than 1,000 hours during the plan year could be excluded from having the option to participate in a 401k plan and thus did not impact the owner-only businesses from setting up a Solo 401k plan. Only those years after 2021 are counted.
2021 and Future Years The three year provision is effective for the 2021 plan year, but years before 2021 do not count for purposes of counting the three-year eligibility.
Long-Term, Part-Time Employee A W-2 employee will be deemed a long-term, part-time employee once he or she completes 500 hours of service/work in three consecutive 12-month periods.
Does the SECURE Act nullify the 1,000 hours of service per year rule? No. 401k plans must now have dual eligibility requirements. An employee can become eligible for the plan by fulfilling either: (a) the one year of service requirement (1,000 hours of service in one year), or (b) the three years of service requirement (at least 500 hours of service for three consecutive years).
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:
Rollover(s)
Employee salary deferral contribution(s)
Employer profit sharing contribution(s)
Roth contributions
etc.
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:
If you had us set up a brand new plan for you, the plan number will always be 001. If you had us amend and restate your existing plan, it may be a number other than 001. Please refer to page 1 of your plan Adoption Agreement to verify your three digit plan number.
Both my spouse and I are participants and co-trustees of our Solo 401k plan. Should we have separate bank accounts under the same Solo 401k, one for each of us?
Answer:
Yes, the rules dictate that you should have separate bank accounts for each participant for each type of monies. Review additional details here:
