SOLO 401K MISFILED - HOW TO HANDLE?

Hi!

I misfiled a Solo 401k with Schwab. I thought I was a 1099 employee, but I am a K-1. I now need to get the IRS to send Schwab a letter of permission to release the funds. I was directed by Schwab to this website (https://www.irs.gov/retirement-plans/correcting-plan-errors-fix-plan-errors) to fill out a Letter of Instruction and then include the Date of Contribution, Amount of Principle, and How to Pay Back. However, after looking into this further, to submit an explanation to the IRS, I will need to create an account at pay.gov. From here, it looks like I will need to submit form 8950. This form requires a minimum fee of $1,500. Seems really high and can not believe they charge this. I tried to see if there was a way I could get this waived, however I don’t think my plan qualifies for the orphan plan, which is mentioned here (https://www.irs.gov/retirement-plans/voluntary-correction-program-fees).

What is the best way to resolve this? I made a stupid mistake and I can't figure out how to fix this.

Help!

Are you a partner in a partnership getting a K-1 and set up a plan just for yourself? I think we need to back up and make sure we understand the problem.

That's correct! Please let me know if I can clarify anything else! 

IMHO, the big issue if you were even allowed to have a "solo 401(k)" (it is a marketing term, 401(k) is a 401(k)) just for yourself in a first place.   Please elaborate the specifics on the business situation.

I am a K-1 which is issued from a partnership (Form K-1 (1065)). Does that help? What other information can I provide that would be useful to understand? 

Well the "best way to fix" could vary from  "somewhat easy" to "somewhat expensive" depending on the facts at circumstances, nature of the Partnership, how many employees there are in the partnership, how many other partners and what if any other Plans exist.

I'd say your best course would be to contact a local ERISA attorney to at least get the scope of the issue and what your correction options will be.

we would need to know a bit more about the nature of the partnership to narrow down the course of action.  

If the plan was never qualified (which it would seem it wasn't) and you did not take a deduction, then legally you should be able to just get your money back without IRS involvement. It's a mistake. You're fixing it. Usually, however, the plan custodians don't understand that, at least not at the level you are dealing with. They don't want to get involved in any tax underreporting/skullduggery so want you to get approval from IRS, which I don't think really fits in this situation since there never was a qualified plan.

Read the plan document and more specifically any basic plan document associated with an adoption agreement.  Most documents have a section that addresses the situation when the plan upon adoption fails to be a qualified.  If you have some difficulty finding the section, it often exists alongside "mistake of fact" language.

The provision typically calls for a return of contributions.  Having the document in hand may facilitate the process of closing down the plan.

If the name of the partnership is "XYZ" and you established the plan under something else, such as your own name, and you have no business activity in your own name, then, as noted above, you don't have a qualified plan and should be able to un-do this. The trick will be to get Schwab to recognize this and not send the money to you as a taxable distribution. 99% of the problem will be figuring out how to deal with the Schwab bureaucracy. 

If you set up the plan in the name of the partnership, that might be trickier, as there is no basis to say the plan is not qualified (other than perhaps to argue that you had no authority to establish it, acting on your own).

And finally, if you have business activity in your own name and set it up in your own name, I'm not sure you could say the plan is not qualified, and you might have an overcontribution problem, which is different, and not easily resolved. Let's hope that's not the case.

Circling back, my take on it is that this is mostly a problem of getting Schwab to return the funds without reporting it. You'll have to spend some time on the phone (most of it on hold) and then some more time saying "no no no you don't understand" and wrangling and arguing until finally you get to someone who hasn't been trained for 30 days and who can actually help you. Good luck.

On 11/21/2023 at 8:26 AM, Bird said:

Circling back, my take on it is that this is mostly a problem of getting Schwab to return the funds without reporting it. You'll have to spend some time on the phone (most of it on hold) and then some more time saying "no no no you don't understand" and wrangling and arguing until finally you get to someone who hasn't been trained for 30 days and who can actually help you. Good luck.

For this to work, the OP would have to completely understand what they're saying and I doubt that would be the case.

OP, you need to bite the bullet and hire an ERISA attorney or an experienced TPA to fix the error. This isn't a minor error. It's a big error that potentially involved a lot of tax deductions and you screwed it up by trying to DIY.

55 minutes ago, Bill Presson said:

For the is to work, the OP would have to completely understand what they're saying and I doubt that would be the case.

OP, you need to bite the bullet and hire and ERISA attorney or an experienced TPA to fix the error. This isn't a minor error. It's a big error that potentially involved a lot of tax deductions and you screwed it up by trying to DIY.

This is totally fair. I tend to the DIY side myself and kind of feel sorry for these folks who get themselves in trouble (with Schwab and their ilk of course providing the rope with which to hang themselves) but your advice is sound.

On 11/20/2023 at 7:19 PM, Luke Bailey said:

If the plan was never qualified (which it would seem it wasn't) and you did not take a deduction, then legally you should be able to just get your money back without IRS involvement. It's a mistake. You're fixing it. Usually, however, the plan custodians don't understand that, at least not at the level you are dealing with. They don't want to get involved in any tax underreporting/skullduggery so want you to get approval from IRS, which I don't think really fits in this situation since there never was a qualified plan.

Agree. This is no different from a school teacher, postal employee, customer service rep, setting up a 401(k) for themself based on their wages/salary. A partner cannot adopt up an employer plan.  The OP needs to engage someone to communicate with Schwab on their behalf, otherwise it might get worse. The Schwab employee who answers the toll-free line might not understand enough to provide the right solution- all the more reason to engage someone who can translate for them.