Hardship Withdrawals and Excess Contributions- The Error and Correction

Solo 401k

 A participant takes a Solo 401k hardship withdrawal and salary deferrals continue. The error is an operational failure, meaning the plan is failing to operate within the terms of the plan document. Treasury Regulation 1.401(k)-1(d)(3) requires that participants wait six months from receiving a distribution to resume contributions.

The correction rules concerning excess allocations apply. Under the excess contribution rules, the plan returns the deferrals, plus any earnings, from the day they were contributed to the day they are distributed. Use Code E on the 1099R, meaning the money is taxed in the year it is distributed. There’s no pre age 59 1/2 10% tax penalty for early distributions.

If the excess deferrals are matched by the employer, it gets more involved. If the match is fixed, the employer deducts the match contribution and any earnings and puts the money into  a forfeiture account for future contributions.

What to do..
Payroll services, unaware of the solo 401k plan provisions, are usually the cause of continued excess deferrals. Solo-k sponsors should establish payroll procedures and see that they are followed.


Solo 401k Plan: Your Opportunity for Checkbook Control of Your Future

Exception to the IRA Pro-Rata-Rule

Solo 401k

Usually, when you take an IRA distribution, all of your IRAs are considered one big IRA
 ( except Roth IRAs).
You may rollover just your taxable IRA funds to your solo-k plan as the solo-k plan allows for it.

You can only fund each of these distribution with the taxable part of your IRA. The pro-rata rule will not apply. Instead, the distribution will consist only of taxable IRA funds.

Example:
Sam has $250,000 in his only IRA. His IRA includes $150,000 in after-tax funds. Sam’s solo-k plan allows rollovers from IRAs. Sam rolls over $100,000 to his solo-k plan. The pro-rata formula does not apply. Instead, the entire $100,000 amount will be pre tax. This means that the $150,000 left in Sam’s IRA is considered to be after-tax funds. Sam will not have a tax bill when he takes any of these funds from his IRA.

Solo 401k Plan: Your Opportunity for Checkbook Control of Your Future

IRS Clarifies Missing Participant Form 5500 Reporting

Solo 401k

The Internal Revenue Service (IRS) announced that filers who have made a concerted effort to locate missing participants due benefit payments will enjoy a lower reporting burden associated with the missing individuals.

Plan sponsors, going forward, until further guidance guidance, “do not need to report on Lines 4I of the Schedule H and I to the Form 5500 and 10f of the Form 5500-SF unpaid required minimum distribution (RMD) amounts for participants who have retired or separated from service, or their beneficiaries, who cannot be located after reasonable efforts or where the plan is in the process of making reasonable contacting efforts at the end of the plan year reporting period.”





Solo 401k Plan: Your Opportunity for Checkbook Control of Your Future

Correct Employer Matches with True Up Conributions.

Solo 401k

 When employers match employee deferrals each payroll throughout the year, each employer contribution is based on the participant deferral for that payroll. 

Any contribution changes an employee makes during the year could change the match amount, even if the  contributions are enough to receive the full amount that year. 

The true-up match additional contribution is how the employer's contributions are adjusted out so participants receive the accurate value from the employer match.

Solo 401k Plan: Your Opportunity for Checkbook Control of Your Future

What You Need to Know if You Stop all Contributions to the 401k Plan

Solo 401k 

While plan sponsors aren’t required to make contributions to their 401(k) plan every year, contributions must be “recurring and substantial” for a plan to be considered ongoing.

IRS Audit guidelines state that if the employer hasn’t made contributions in three of the past five consecutive years, the plan may have incurred a complete discontinuance of contributions.

When this occurs, the plan sponsor must treat the plan as a terminated plan and fully vest all participant accounts for the plan to remain qualified.

Determining if there’s been a complete discontinuance of contributions is based on facts and circumstances, for example, the plan sponsor’s history of profitability, and the probability of future contributions from the sponsor.

If you haven’t made contributions to your 401k plan for three of the past five years, consider

1. Your history of profitability/ability to make contributions.
2. Whether you’ll be able to make contributions in the future.

Solo 401k Plan: Your Opportunity for Checkbook Control of Your Future

Consequences of RMD distribution failure

When plan sponsors don’t pay and a participant doesn’t receive a RMD:

• The plan sponsor faces the potential disqualification of the plan which ultimately affects all plan participants.
• The plan participant who should’ve received the RMD may be liable for an excise tax under IRC Section 4974 equal to 50% of the amount of the RMD not received.

Plan Sponsors should review their files and make sure those employees  subject to the RMD rules receive the distributon.

Solo 401k Plan: Your Opportunity for Checkbook Control of Your Future

Consultant Not an ERISA Fiduciary

Solo 401k

The Tenth Circuit dismissed the complaint because the petitioner failed to sufficiently allege that the consultant had fiduciary status.  

The Court explained that “fiduciary status requires authority or responsibility that is discretionary, which entails ‘the freedom to decide what should be done in a particular situation’” and that conducting a routine computation, as required by one’s job, does not require discretion.  The Court also relied on the Department of Labor’s regulations, 29 C.F.R. §§ 2509.75-8 and 2509.75-5, which explain that “a person who performs administrative functions, such as calculating benefits, does not automatically have discretionary authority.”  Because the Court concluded that the consultant was not a plan fiduciary, it determined that it need not decide whether the fiduciary status could support liability of the other defendants.

The case is Lebahn v. Nat’l Farmers Union Unif. Pension Plan, et al., No. 15-3201, 2016 BL 221313 (10th Cir. July 11, 2016).

Solo 401k Plan: Your Opportunity for Checkbook Control of Your Future

New Changes for Small Plan Filers Not Using the Form 5500-SF

Solo 401k

The Proposed 5500 Revisions also make significant changes for small plans that are not eligible to file a Form 5500-SF. For
these plans, the Proposed Revisions –

1. Eliminate the Schedule I, the schedule currently used by small plans to report financial information;
2. Require that the Schedule H be completed, including the schedules of assets, though small plans that arecurrently exempt from the audit requirement will continue to be exempt under the Proposed Revisions;
3.  Revise the Form 5500 to add a new question asking defined contribution pension plans to report the number of participants with account balances at the beginning of the plan year; and
4.  Revise the audit exemption to be based on the number of participants with account balances as of the beginning of the plan year, rather than on the total number of participants at the beginning of the plan year.

Solo 401k Plan: Your Opportunity for Checkbook Control of Your Future

Use QLAC's to Reduce Your RMD Distribution

Reduce your Required Minimum Distributions with a Qualified Longevity Annuity  Contract

You can invest up to 25% , up to $125, 000, of your Solo 401(k) account balance in an annuity called a qualified longevity annuity contract. Funds in a Qualified Longevity Annuity Contract are disregarded for Required Minimum Distribution purposes. A Qualified Longevity Annuity  Contract is a deferred-income annuity that begins payments some years after your investment. Check this--- a 70-year-old woman who invests $125,000 in a Qualified Longevity Annuity  Contract will get an estimated $23,750 per year starting at age 80, or $46,500 per year if payments start at age 85 . That will reduce the Required Minimum Distribution at age 71 by an estimated more than $4,750.

Solo 401k Plan: Your Opportunity for Checkbook Control of Your Future