Leaderboard

For FWIW I see a lot of 'solo-k' plans with safe harbor in them, particularly SH to NHCE only. In the event an employee is hired and becomes eligible, the SH is already built into the plan document without a need for an amendment. Similarly - I don't like to see them with no service requirements/ immediate entry. A better design is the maximum 1 year of service, age 21, semi-annual entry etc so that if someone is hired who isn't the owner, there is time for an outside party to review the plan provisions before there are any errors, such as a missed opportunity to defer. If someone is hired that they want to let in sooner, usually its not a big deal to do an amendment to change that.

This sounds odd to me because a solo 401k plan, by its nature and legal structure, does not (usually?) have the safe harbor feature that is found in traditional 401k plans because those rules ensure that the plan is not discriminating between the employees and HCEs or owners. Solo 401k plans are specifically structured for owner-only businesses without full-time employees (except the owner(s) and possibly their spouse(s)). If the owner(s) hire full time employees, they may want to implement a plan with safe-harbor features so they could contribute the safe harbor contributions without testing but that wouldn't let them provide an additional 21% nonelective contribution just for the owner(s) as any contributions in excess of the safe harbor would have to be tested under 401(a)(4). That said, back to your actual question, annual additions paid to a participant's account cannot exceed the lesser of: 100% of the participant's compensation, or $70,000 (assuming <age50) for 2025. But, as you state, there is also the deduction limit where an employer’s deduction for contributions to a defined contribution plan cannot be more than 25% of the compensation paid (or accrued) during the year to eligible employees participating in the plan. Since the 25% limit is on the employer's deduction for contributions to the plan it does not apply to the salary deferrals as the deduction for those deferrals is really for wages paid. See 404(n). So with $100K compensation, assuming these are W-2 wages, she can contribute $23,500 (assuming <50) and she as employer can contribute an aggregate employer contribution of $25K in 2025. Note that I am assuming these are W-2 wages. If her compensation is actually earned income, there will be a difference (see Self-employed individuals: Calculating your own retirement plan contribution and deduction | Internal Revenue Service). Also, this example assumes only one owner and no spousal compensation.

Online is a fine starting point, depending on your resources, but personally, I don't rely on information I find online unless those sources are citing IRS authorities and I have tracked it back to those authorities. Here, I would simply look at Rev. Proc. 2021-30 and the 1099-R instructions. My recollection is that Rev. Proc. 2021-30 has special rules for excess additions/allocations that specifically state that a 1099-R is to be used with 415 corrections and the instructions for the 1099-R have specific rules for distributions under EPCRS. Of course, don't rely on my statements.... Based on the facts you provided, it appears that there are no matching contributions, so in my view the correction should be first, to distribute 2025 salary deferral contributions (adjusted for earnings), then, if any excess remains, to forfeit 2025 employer profit-sharing contributions (adjusted for earnings if necessary) until the annual additions no longer exceed the 2025 415(c) limits. This priority order is used so the participant retains as much of the employer monies that they can. The corrective distribution (not the forfeiture, if any) made to the participant, presumably in 2026, should be reported on a 2026 Form 1099-R. The participant should include the distribution as income in 2026 but does not have to pay the 10% additional tax on early distributions under IRC Section 72(t). I think this is a Code E but not certain. The distribution is not eligible for rollover (the 1099-R should reflect this and we usually send a letter of explanation making that clear). The forfeited employer contributions (plus earnings) should be transferred to an unallocated plan account, which must be used to reduce employer contributions in subsequent periods. No additional employer contributions are to be made to the plan until the unallocated plan account balance is reduced to zero. This is not an instance where the participant has the double whammy of income in the year earned and income in the year distributed (which applies to late distributions of excess deferrals or 402(g) busts).

well box 5 is specifically Medicare Wages and Tips, which may or may not be the same as the plan document's definition as W-2 Compensation. You should double check the basic plan document for the actual definition of W-2 compensation, which might be different. For many documents W-2 comp really means anything that could be reported on a W-2, so its more often box 1, plus pre-tax amounts in Box 12, plus pre-tax amounts not reported on the W-2(such as §125 deferrals). I'm not sure what you mean by Gross Compensation either.

I was in undergrad when that movie came out. A friend of mine got a student job in the computer operations room. He had access to the system that was more than maybe you should give to a student. All the workers came to work one morning and the first message they got on their work terminal was: Do you want to play a game? How about Thermal Nuclear War?

This is a function that may be outsourced, and it is more than just signing the Form 5500. The Plan Administrator is responsible for the day-to-day operation of the Plan. Our recommendation to business owners, who are not in the business of running a Qualified Retirement Plan, is to outsource this function. While the business owner continues to be liable for the actions of the choosing an outsourced Plan Administrator, they are relieved of those day-to-day operational issues.