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Automatic enrollment in the Solo 401k

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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:

Forms to Administer Solo 401k Plan

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:

https://www.irs.gov/pub/irs-pdf/f8881.pdf
https://www.irs.gov/instructions/i8881

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.

  • File Form 8881 to claim the tax credit

Additional resources

https://www.irs.gov/pub/irs-tege/auto_enroll_fact_sheet.pdf
https://www.irs.gov/retirement-plans/faqs-auto-enrollment-what-is-an-automatic-contribution-arrangement-in-a-retirement-plan
https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-automatic-enrollment
https://www.dol.gov/sites/dolgov/files/ebsa/about-ebsa/our-activities/resource-center/publications/automatic-enrollment-401k-plans-for-small-businesses.pdf

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

Plan number

What is my plan number?

Answer:

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.

Filling out a W-9 for the Solo 401k Trust

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The bank sent me a Form W9 to fill out for my Solo 401k Trust.  How do I fill it out?

Answer:

Fill out form as follows:

  • 1 - Fill in the name of your Solo 401k Trust (refer to IRS letter for the exact spelling)
  • 2 - Leave blank
  • 3 - Check "Other"  and fill in "401k Retirement Trust"
  • 4 - Enter code "1" for "Exempt payee code"
  • 5 and 6 - Enter your address as the Solo 401k Trustee
  • Part I - Enter the EIN for your Solo 401k Trust (refer to IRS letter)
  • Part II - Sign and date

Plan year different than employer fiscal year

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Can the plan year be different than the employer fiscal year?

Answer:

Yes, the plan year can be different from the fiscal year, but you must then pay careful attention to the deadline for making contributions.

The deadline for depositing employee salary deferrals into the plan is relatively straightforward. However, the same cannot be said for the profit sharing contributions.

For profit sharing contributions, there are different rules depending on the purpose of the deadline. In other words, one set of regulations may specify one deadline for compliance purposes, but another set requires a different deadline for deduction purposes.

In order to deduct a contribution for a given year, it must be deposited by the due date (including extensions) of the company tax return.

For example, ABC Company is a calendar year tax filer. Its 2015 company return is due March 15, 2016, but can be extended to September 15th. If ABC Company does not extend the due date of its company return, it must deposit its contributions to the plan no later than March 15, 2016, in order to claim the deduction on its 2015 return. If ABC does extend, the deposit must be made no later than September 15th.

The Annual Additions limit refers to the total amount of contributions that can be allocated to a participant's account for a given limitation year. In most cases, the limitation year is the same as the plan year. In order for a company contribution to be treated as an annual addition for a given year, that contribution must be deposited no later than 30 days following the due date of the company tax return (with extensions).

For example, the ABC Company extends the deadline for the 2015 company tax return to September 15, 2016. The date by which they would need to deposit the profit sharing contribution in order for it to be treated as a 2015 annual addition is October 15, 2016, which is 30 days after the September 15th tax-filing deadline.

Correcting Solo 401k Trust EIN

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While doing my taxes this year, my accountant realized that my Solo 401k trust has the same EIN as my business. After reviewing the paperwork you originally sent me, I realize that I made an error when I setup my Vanguard account. I gave them my business EIN instead of the trust EIN. Can I rectify this by just giving Vanguard the trust EIN?

Answer:

Contact Vanguard and explain that you originally provided them with the incorrect EIN and ask to correct it. Provide them with the copy of the letter from the IRS reflecting the correct number. Make sure as well that the account name is correct by comparing it with your plan documents.

 

What is a pre-approved plan?

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A pre-approved plan is one that the IRS has reviewed and approved all of the options that are available. The IRS issues an advisory or opinion letter as evidence of the plan's pre-approved status.

All employers who adopt a pre-approved plan covered by the IRS letter are entitled to rely on the approval letter issued at the “global” level without applying for their own, individual determination letter.

Our plan documents include the IRS letter.  It is typically sent as a link in the email which accompanies the plan documents.

Why do I need to keep amending my plan?

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Qualified plans are governed by a set of Federal laws enacted by Congress and regulated by various agencies. The IRS is responsible for oversight of the tax aspects of retirement plans, and the DOL is responsible for reporting, disclosure and fiduciary aspects of retirement plans.  The result is a continual change in the laws due to changing legislation and regulations issued to oversee compliance with the laws. As a result, there are frequent changes in the law but in most cases they are not major ones. A requirement to have a qualified retirement plan is that it must be in writing. This means that as the laws change, your plan must generally be amended to reflect the changes.

Is the 401k Trust revocable or irrevocable?

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Is the 401k Trust revocable or irrevocable?

Answer:

Revocable and irrevocable trust are terms that are usually applied to a personal trust – one that an individual would set up for estate planning purposes. Those terms are not applied to a qualified plan’s trust, such as the one that is established for a 401(k) plan or a profit sharing plan.

A qualified plan’s trust is similar to an irrevocable trust in that once contributions go into a qualified plan trust, those monies must remain in the trust until distributed to participants, or, for a defined benefit plan, sometimes upon plan termination, if there are surplus assets.

A qualified plan’s trust is similar to a revocable trust, though, in that the plan sponsor (sponsoring employer) and/or the document sponsor may amend the terms of the trust document. Participants (those who would be considered the beneficiaries of the trust) do not consent to the changes to the terms of the trust document.

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