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