Solo 401(k) Mess

A self employed person with no employees uses a payroll company to handle payroll.  They have no employees and no other business.  

The Owner intended to set up a Solo(k), and the payroll company took $20,500 as a pre-tax deferral for 20,500. The Owner never drafted documents to get a Plan set up and the $20,500 is setting in a  business savings account commingled with other monies.  They have already filed their 2021 taxes.

How would you handle? Would you draft a document and have the move the $20,500 (plus earnings) into an investment account?  And if so, would you also calculate lost earnings due to the late deferral?

Or just tell them not set up a Plan at all for '21 and start with a Plan for '22?

Ugh, these Solo(k)'s can get so messy.  Probably needs to be some more regulations around these so people don't continuously mess these up, IMO.  

You have deferrals with no plan. Amend the W-2 to show no 401(k). File an amended tax return for 2021.

If they filed by April 15, too late to set up PS plan for 2021. If they were on valid extension but filed after 4/15 you could put in PS plan under secure with up to 25% employer contribution. Assuming their W-2 pay was at least $82,000 you could cover the $20,500 as employer contribution and the tax implications would be a wash (I think but I'm not CPA).

Make sure he adopts a 2022 401(k) Plan (or amendment to SECURE adopted doc if you can do it) before he makes 2022 401(k) contributions.

Without knowing all the facts, I'd say this is simple, no mess at all, really.  The individual never set up a plan.  If the $20,500 you speak of was erroneously not included as taxable income on his 2021 income tax return, then he should file an amended return for 2021 and pay the appropriate taxes, etc.  Fresh start and do it the right way for 2022 if he is still interested in having a solo(k) plan.  Does he have the right to damages from the payroll company or an advisor?  I'd have to know more facts.  This is free advice is from a layman.