Search the Community

Does anyone have any recommendations to prevent a 402(g)(1) failure given the following information? Facts 1. Participant A receives compensation from Company X and defers $18,000 in salary to a qualified retirement plan in the 2015 plan year. 2. Participant A also receives Self Employment Income of $9,000. 3. Participant A sets up a Solo 401(k) Plan for herself, and “defers” $9,000 of income to her Solo 401(k) Plan in the 2015 plan year. This contribution wasn’t coded by the investment house. Question: What is the best way to treat the $9,000 contribution to minimize the amount of potential excise tax due? Solutions 1. Profit Sharing: The $9,000 could be considered a profit sharing contribution, but it would be limited to 25% of compensation. So: a. $2,250 ($9,000 * 25%) would be a deductible contribution, b. $6,750 ($9,000 - $2,250) would be a nondeductible contribution, and c. $675 ($6,750 * 10%) would be due in excise taxes due to the nondeductible portion of the contribution. 2. Voluntary Contribution: The $9,000 could be considered a voluntary contribution, and it would be limited to 100% if compensation. So: a. No excise would be due, but the plan did not provide for voluntary contributions in 2015. Has anyone encountered this problem? If so, do you have any recommendations aside from the two solutions listed above? Thank you, A