Solo 401(k) and cash balance overfunding correction

[ejohnke]

I have a solo 401(k) that has already been fully funded for the 2022 plan year ($61,000) and they recently decided they want to open a cash balance plan for greater tax benefits. If they open a cash balance plan, their solo 401(k) will be over funded $22,500 in employer contributions. They would like to remove the overfunding from the 401(k) plan to open and maximize their cash balance plan for 2022. What type of correction would this be (excess annual additions, mistake of fact)? What is the best way to go about correcting this?

[Bri]

Starting next year, or paying the excise tax.

[Riley Britton]

It's not excess annual additions or mistake of fact. They need to start in 2023. 

[ejohnke]

What type of violation is this and what is the appropriate way to fix it? My client will likely want to pay an excise tax to be able to significantly increase his tax savings through a cash balance plan for 2022.

[CuseFan]

Not an option - more than 6% ER was contributed to DC so there is a 31% combined plan deduction limit for 2022, end of story. Can still do CB for 2022 and deduct up to that 31% total for 2022 and deduct the rest for 2023. Maybe the 2023 total max CB deduction is high enough to cover that residual 2022 plus the 2023 minimum, maybe not - it could be 2024 before deductions catch up.

They can try to remove the 2022 PS in excess of 6% and maybe it never gets caught, but if it does, you've got some 'splaining to do Lucy and I don't think IRS will buy the excuse. 

[thepensionmaven]

I'm sure there will be some who disagree

In the past, I have seen money from one plan transferred via trustee-to- trustee transfer from to another, as long as this is done prior to end of year. You did not say the CB document had as yet been prepared, get it done ASAP and treat the excess as the initial contribution; and be glad no other participants. I can not say whether this will "fly", just that I have see this done.

I assume by the term "solo 401k", you are speaking of a brokerage house prototype, they may not allow such a transfer and give the client a 1099; just make sure Code D.

FWIW, the term "solo 401k" was invented by brokerage houses to make prospects think this is a nee type of plan. We all know it is not

[truphao]

This is a very interesting topic, so I am going to play a "devil's advocate" for a moment.   What about an idea of treating the excess over 6% as "after-tax" contribution? Obviously, this is likely not to be supported by the Brokerage House "solo 401k" document.  That can be addressed by restating the solo 401k doc before December 31st, can't it be?

[Bird]

15 hours ago, truphao said:

This is a very interesting topic, so I am going to play a "devil's advocate" for a moment.   What about an idea of treating the excess over 6% as "after-tax" contribution? Obviously, this is likely not to be supported by the Brokerage House "solo 401k" document.  That can be addressed by restating the solo 401k doc before December 31st, can't it be?

If it is a sole prop, yes you can make that case, in that the numbers can work out; not saying it isn't somewhat aggressive. We did it once. I don't think it can be made to work in a corporate setting.