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Continuing with what Bill Presson pointed out, perhaps a more clear way to think about it, and what you are required to report on the Form 945, is when the tax liability was created. Although the payment of the tax may not be due until the 15th of the month following the month of the distribution, the tax liability was created in the month of the distribution. It can be confusing when you are crossing over into a different year (e.g. December distribution, January tax payment), but in your situation it seems clear to me that you would prepare a Form 945 for the 2020 year, because that is the year the tax liability was created. Hopefully when the accountant paid the taxes on January 8th, 2021, he/she/they indicated it was for the 2020 tax year and not the 2021 tax year. Best of luck to you.

Do not adjust the W2.

Since it was a rollover, you don't use code 1. It's strictly a G.

The documents my firm uses specifically defines the exception as "terminates employment after attaining Normal Retirement Age," so I'm lucky. The amusing scenario is when someone retires at, say, 66, gets a final contribution that year. Then is later rehired back part time, and doesn't hit the 1000 hours, so they can't get subsequent contributions until they actually re-terminate.

Well for one if they have funded the 401(k) for 2021 and terminate in January they may run into 415 limit issues depending on the size of the contribution. If they had employees who were eligible but not contributing they probably have ADP (and ACP if there is a match) issues. Lastly they are almost certainly top heavy under 416. If they are looking at a 401(k) to cover the rest of the employees, they probably already have one in the "solo-k" and just don't know it. As Bill mentions amending and restating the existing 401(k) is likely the path of lease resistance. As for a good option I woold recommend calling several local TPA firms to get quotes on converting the existing solo-K plan document and transferring the administration to them.

They can't terminate, distribute the deferrals, and establish a new plan without satisfying the successor plan rules under IRC 401(k)(10)(A). I agree with Bill - what they want to do is silly. Possible their current document, being a "solo k" document (that term drives me crazy) may not have the provisions they need, so the solution is NOT to terminate the plan, but to amend (or restate, if necessary) their EXISTING 401(k) plan. P.S. - the regulation may be rather more illuminating. 1.401(k)-1(d)(4).

Well, if they terminate the plan in the very near future, it will cause a limitation on the 415 allocation amounts. There are also some who argue that a sole proprietor doesn't have earned income until the last day of the year, so it would probably cause a $0 allocation eligibility. Also, there are timing restrictions on terminating a 401(k) and starting a new one. So, I would highly recommend they not terminate the plan in 2021. They should hire a TPA and then decide where they want the money to go.

Interesting. I wonder if the participant figured that income tax rates might increase substantially in 2021, so decided to take on the income taxes in order to take advantage of the historically low rates in the 2020 taxable year.

I'm just speaking off the cuff here without looking into it further - if your pan has this "fail safe language" then I think you are stuck. But if it doesn't have such limiting language, it seems to me that 11(g) doesn't limit you in such a manner. Perhaps the corrective amendment (which would most likely be nondiscriminatory - I assume you are talking generally about NHCE's) could say you will remove the allocation conditions for all participants who worked more than (x) hours - or something along those lines. Don't know if others will agree - again, this is without any investigation on my part. Caveat Emptor!

You're good to allocate up to the 415 limits.

Line 4 says total deposits for 2020. It doesn't say total deposits in 2020. It would show what you deposited. Why would you do a 945 in 2021?

The restriction of in-service distributions prior to age 59.5 applies only to certain sources of funds such as elective 401(k) contributions. If the plan has some other in-service condition and the funds were from an eligible source, such as employer profit sharing I see no reason why the rollover would not be allowed. And Bill is correct a rollover should have Code G, not Code 1 for a rollover.

The $35K released from the suspense account is not being deducted, it's simply being allocated so I don't see a problem with allocating $160,000 as long as it follows plan and IRS rules and complies with 415. If you had a client who was reallocating $35K of forfeitures on top their 25% of pay employer contribution, would you have a problem with that? I wouldn't.

As long as accountant deposited it as a 2020 tax liability, you wont have any problems. If accountant deposited it as 2021 tax liability, you will get IRS love letters.

The form is to report taxes withheld during the year regardless of when they are due to be deposited.

Today I learned ANPRM = Advanced Notice of Proposed Rulemaking