Solo 401K Excess Employer Profit Sharing Contribution--Ugh

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sdvan
Posts: 124
Joined: Wed Sep 09, 2009 5:52 pm

Solo 401K Excess Employer Profit Sharing Contribution--Ugh

Post by sdvan » Thu Apr 19, 2018 5:15 pm

It appears that I (as employer) over contributed profit sharing dollars to my solo 401K by $830.32 for 2017. I had two clients that sent checks on Dec. 31, 2017 that I didn't receive until 2018. That missing income left me just shy of the net earnings to cover my last 2017 profit sharing check of $3K. I've spent some time reading this site and searching the web for next steps. I also spoke with Fidelity's solo 401K folks. I have not yet contacted my accountant. I am trying to avoid spending a bunch of accountant money to correct such a minor error that I believe will cost me $83 in excise tax. I would love to ask this group some questions and for some advice:

1. Fidelity told me to send them a letter telling them that I made an excess contribution and ask them to remove the excess and send it back to me along with the earnings. I told them that sounded like the answer to an employEE excess contribution (based on an earlier thread and posts by Spirit Rider). They told me that I should follow the same process for an employER excess contribution. Does that sound right? To make matters more complicated, they said that I also need to calculate the earnings on the $830.32 and ask for that back too. I told them I'd read where brokers made the earnings calculation and they said "not for a solo 401K." He said I could ask my accountant to do the calculation. But, that is what I am trying to avoid. I could spend $2K asking my accountant to fix what I believe is an $83 issue. Plus, I question if this is the correct response based on what I read by Spirit Rider.

2. Assuming Fidelity is wrong, am I correct that I just need to file Form 5330 with the IRS by the end of July along with a payment of the 10% penalty?

3. One other option that I wondered about is whether I should just count all or part of the money I received in January 2018 as received in December 2017. That saves all of this hassle. But, I think it could cost me in income taxes based on the tax rate changes between 2017 and 2018. And, I doubt that I could just count the income that I need to cover this in 2017 ($4,211.48) as opposed to the $30K that was all received at the same time. But, even if I could, the taxes on an extra $4,211.48 in 2017 versus 2018 would likely be much higher than the 10% excise tax on $830 in excess contributions. Although, if I have to use my accountant to figure this out, I could easily spend much more than the extra taxes.

Ugh. I am kicking myself for being so dumb. I've always been way above the minimum so I didn't worry about this at all. But, I am intentionally slowing down and I didn't think about this one issue.

Any thoughts or advice very welcome!

SDVAN

sdvan
Posts: 124
Joined: Wed Sep 09, 2009 5:52 pm

Re: Solo 401K Excess Employer Profit Sharing Contribution--Ugh

Post by sdvan » Thu Apr 19, 2018 6:04 pm

In a quick look at the tax brackets for 2017/2018, it might only cost me about $150 in extra taxes if I could count $5K of my income as 2017 income. In the past, my accountant has suggested that we count income in the earlier year when it didn't make any tax rate difference. So, follow up question:

Could I count the January 2018 income as 2017 income? If so, do I have to count all of it ($30K)?

If I could just count $4,211.48 as 2017 income, that would only cost me about $127 in extra taxes. That would be worth it to me to avoid the $83 excise tax and to avoid having to figure all of this out and/or to pay my accountant a bunch of money to figure it out/fix the problem.

Is this a possibility?

Spirit Rider
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Re: Solo 401K Excess Employer Profit Sharing Contribution--Ugh

Post by Spirit Rider » Thu Apr 19, 2018 8:53 pm

  1. I'm surprised that a Fidelity CSR would give you wrong information on this. They are either confusing this with 401k employee elective contributions or IRA contributions. It is not normally possible to return excess 401k employer contributions. Refer to Publication 560 Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans), pages 15 and 16. It is very clear on what the procedure is. You will see no description there on removing the excess contribution from a qualified plan.
  2. Yes, but you will also need to reduce your 2018 401k employer contribution by the amount of the excess contribution below your allowed 2018 contribution amount. See Table 4-1 on page 15. Then you will need to file a 2018 Form 5330 next year to reconcile the 2017 excess contribution with the available 2018 contribution space. This is exactly the same process as Form 5329 for excess IRA and HSA contributions that are not removed by the tax filing deadline.
  3. This is a borderline case. You should research the rules on constructive receipt. Normally, if a check was mailed on 12/31/17 you could not have received the check in 2017. I believe there is a rule that if you could have picked up the checked in person, then 12/31/17 was the constructive receipt date. However, it would be all or nothing for the full amount of all checks.
Now you know why I have been beating to death that you should not try to maximize your one-participant 401k employer contributions during the tax year. If you made these contributions in January 2018, you can simply reallocate the proper amount of the contributions when you claim your tax deduction on the return.

sdvan
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Re: Solo 401K Excess Employer Profit Sharing Contribution--Ugh

Post by sdvan » Thu Apr 19, 2018 10:15 pm

Thanks Spirit Rider! One follow up question: Could I recharacterize my “employer” contribution as an “employee” contribution? I submit all of the money I give to Fidelity on the same form (401K contributions and profit sharing). I do have to list what amounts go to what category. So, I think it could be tough to say that I overcontributed as an employee with the documentation showing that I directed the money be handled as profit sharing. Nonetheless, as I try to figure out the cheapest (read no accountant cost) resolution, I thought I’d at least ask this question. Thanks.

aqan
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Re: Solo 401K Excess Employer Profit Sharing Contribution--Ugh

Post by aqan » Thu Apr 19, 2018 10:52 pm

sdvan wrote:
Thu Apr 19, 2018 10:15 pm
Thanks Spirit Rider! One follow up question: Could I recharacterize my “employer” contribution as an “employee” contribution? I submit all of the money I give to Fidelity on the same form (401K contributions and profit sharing). I do have to list what amounts go to what category. So, I think it could be tough to say that I overcontributed as an employee with the documentation showing that I directed the money be handled as profit sharing. Nonetheless, as I try to figure out the cheapest (read no accountant cost) resolution, I thought I’d at least ask this question. Thanks.
The employee at my local fidelity branch told me that they don’t report the details to IRS and it’s upto me to report the employee and employer portion of the contribution.
Not sure how much you can trust this statement but maybe worth a chat with Fidelity reps.

Spirit Rider
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Re: Solo 401K Excess Employer Profit Sharing Contribution--Ugh

Post by Spirit Rider » Thu Apr 19, 2018 11:48 pm

sdvan wrote:
Thu Apr 19, 2018 10:15 pm
Thanks Spirit Rider! One follow up question: Could I recharacterize my “employer” contribution as an “employee” contribution? I submit all of the money I give to Fidelity on the same form (401K contributions and profit sharing). I do have to list what amounts go to what category. So, I think it could be tough to say that I overcontributed as an employee with the documentation showing that I directed the money be handled as profit sharing. Nonetheless, as I try to figure out the cheapest (read no accountant cost) resolution, I thought I’d at least ask this question. Thanks.
I had assumed that you had maximized your employee elective contributions first. Generally, you should always maximize employee elective contributions before you make employer contributions.

The only reason Fidelity records that information is to assist you with checking your employee elective contributions against the limit, 2017 = $18K and 2018 = $18.5K. 401k. The Fidelity rep is correct. 401k custodians do not report contributions or anything else to the IRS.

The 401k administrator (you) is responsible for allocating and recordkeeping the employee and employer contributions. So there is really no need to "recharacterize" the contributions. They only need to be properly allocated by your tax filing deadline including extensions.

Note: You would not be able to do this as an S-Corp shareholder-employee. In that case your employee elective contributions must be deducted from compensation not already received with a pay date no later than 12/31.

What were your net self-employment earnings, employee elective contributions and employer contributions.

sdvan
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Re: Solo 401K Excess Employer Profit Sharing Contribution--Ugh

Post by sdvan » Fri Apr 20, 2018 12:15 am

Sorry if this is a red herring. I did maximize my employee contributions first. Then, I put in the employer profit sharing. I am over $830 regardless. Would it help me if it were an excess employee contribution?

I had net earnings of $186K. I contributed $24K (including catch up) as employee 401K contributions and I contributed $36K as profit sharing. Two online calculators tell me that I contributed about $830 too much profit sharing.

BusterMcTaco
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Re: Solo 401K Excess Employer Profit Sharing Contribution--Ugh

Post by BusterMcTaco » Fri Apr 20, 2018 12:34 am

If you change your reporting to an accrual basis instead of cash basis you may be able to count more income in 2017. There are probably lots of details to consider if you do, and it may be too late, but it's one other option to consider. Did you file an extension on taxes?

Rob1
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Re: Solo 401K Excess Employer Profit Sharing Contribution--Ugh

Post by Rob1 » Fri Apr 20, 2018 12:44 am

I believe the limits have nothing to do with earnings, but are instead linked to compensation with the below limits:

"$54,000 ($60,000 including catch-up contributions) for 2017."
"However, an employer’s deduction for contributions to a defined contribution plan (profit-sharing plan or money purchase pension plan) cannot be more than 25% of the compensation paid (or accrued) during the year to eligible employees participating in the plan"

Source: https://www.irs.gov/retirement-plans/pl ... ion-limits
Last edited by Rob1 on Fri Apr 20, 2018 12:59 am, edited 2 times in total.

Rob1
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Re: Solo 401K Excess Employer Profit Sharing Contribution--Ugh

Post by Rob1 » Fri Apr 20, 2018 12:57 am

In case you are interested (for 2018 and beyond), this is how I manage things to avoid issues. Note that per my CPA, even though my corp does cash basis accounting, there's a provision that allows the corp to accrue profit sharing.
  • Early Dec - I make some projections on how to maximizing profit sharing via a one time bonus.
  • Late Dec - I run the numbers again and process a bonus payroll. I do not fund profit sharing yet.
  • Feb - My CPA prepares tax returns and provides me with an exact amount for the previous year's profit sharing. I accrue this amount
  • By March 15 deadline - I fund profit sharing

Spirit Rider
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Re: Solo 401K Excess Employer Profit Sharing Contribution--Ugh

Post by Spirit Rider » Fri Apr 20, 2018 7:05 am

Rob1 wrote:
Fri Apr 20, 2018 12:44 am
I believe the limits have nothing to do with earnings, but are instead linked to compensation with the below limits:
Incoorect.

While it is true that maximum employer contributions are 25% of compensation. Net self-employment earnings = earned income and have everything to do with the employer contribution limit. A self-employed individual calculates their employer contribution as 20% of net self-employment earnings.

Spirit Rider
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Re: Solo 401K Excess Employer Profit Sharing Contribution--Ugh

Post by Spirit Rider » Fri Apr 20, 2018 7:14 am

sdvan wrote:
Fri Apr 20, 2018 12:15 am
Would it help me if it were an excess employee contribution?
I have stated before that I could not recommend allocating an excess employer contribution as an excess employee elective contribution without the explict advice of a retirement plan professional. That is not the correction method proscribed by the IRS.

However, in this case it doesn't matter, because IRS regulations set a deadline of April 15th to remove excess employee elective contributions.

sdvan
Posts: 124
Joined: Wed Sep 09, 2009 5:52 pm

Re: Solo 401K Excess Employer Profit Sharing Contribution--Ugh

Post by sdvan » Fri Apr 20, 2018 1:25 pm

Thanks Spirit Rider. So, I think I am down to two options.

1. Treat the $30K as paid in 2017. I double checked and the check was dated Dec. 28, 2017. However, I didn't receive it until January 3rd. In the past, when the rates were the same for both years, my accountant has encouraged me to just treat the income as received in the earlier year because that avoids having to explain the difference in the 1099 amount on my return. However, this year we agreed that it made sense to treat the money as received in 2018 because of the change in tax rates. I calculate about a $1K difference in taxes. So, this option isn't very attractive other than it is simple and doesn't require spending money on my accountant.

2. File Form 5330 and pay the excise tax. My hangup with this option is that I might spend more than $1K asking my accountant to figure all of this out (doubt his firm does much of this sort of thing) and to file the form. Is this something that I could do on my own? Are there easily understandable instructions somewhere?

Thanks for your thoughts and advice!

SDVAN

Spirit Rider
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Re: Solo 401K Excess Employer Profit Sharing Contribution--Ugh

Post by Spirit Rider » Fri Apr 20, 2018 2:43 pm

With a check date of 12/28/17 it is certainly plausible/likely that you constructively received the check in 2017 and you just failed to "notice" it in your mailbox in 2017 and deposited/cashed it in 2018. I would properly take option 1 and consider this 2017 income and to the degree it increases your net self-employment earnings and maximum employer contribution.

I would increase your contributions, but only after completing your tax return, knowing the precise amount to deduct and contribute. Did you factor in the increased tax savings from the extra deduction this year vs next year in your cost calculation?

sdvan
Posts: 124
Joined: Wed Sep 09, 2009 5:52 pm

Re: Solo 401K Excess Employer Profit Sharing Contribution--Ugh

Post by sdvan » Fri Apr 20, 2018 3:14 pm

The check did not arrive at my office until January 3, 2018. I presume that it was mailed on Dec. 28, 2017. However, it was in transit and not available to me until it was delivered to me on January 3, 2018. With the change in tax rates between 2017 and 2018, I would pay about $1000 if I say that I constructively received the payment in 2017. Yes, that would solve my excess contribution to my 401K/profit sharing. But, at a pretty significant cost. I reviewed the language about constructive receipt and I think I am correct to say that I received it in 2018.

I just read the Form 5330 instructions and I think I can put this together and pay the $83 excise tax. That seems preferrable to paying an extra $1K in taxes, right?

Can I confirm a few details on 5330:

I only put the tax due ($83.03) on lines 1, 7, 17, & 19. There are no additional entries on the Form proper itself?
On schedule A I put $60K on line 1, $59,169.68 on line 2, and then $830.32 on lines 3, 9, and 11. Then, I put $83.03 on line 12.
Is there anything more to this?

Thanks very, very much for your help and expertise!

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