Preventing 402(g)(1) Failure

[anonymousbl]

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

[Lou S.]

did she put the 9,000 in in 2015 or 2016?

did she have an election to defer to the solo-k before 12/31/15?

is she catch-up eligible?

[anonymousbl]

did she put the 9,000 in in 2015 or 2016?

did she have an election to defer to the solo-k before 12/31/15?

is she catch-up eligible?

did she put the 9,000 in in 2015 or 2016? - In 2015

did she have an election to defer to the solo-k before 12/31/15? - Not sure because no election form was provided.

is she catch-up eligible? - No

[Lou S.]

Sounds like your solution #1 is the correct one. Though her net earnings for the 25% calculation may be off as you need to back out 1/2 the SE tax and the contribution that she makes.

[Mike Preston]

Something is fishy. How did she know her net income in time to make a $9k contribution *IN* 2015?

[Lou S.]

Something is fishy. How did she know her net income in time to make a $9k contribution *IN* 2015?

She probably didn't maybe still doesn't. It sounds like she had gross receipts from "consulting" or some such of $9K and threw them all in a solo-k because some one told her she could defer a 100% of it and not pay taxes.

At least that's my guess of the less than accurate advice she probably got.