Excessive profit sharing

I am not sure whether this forum would be helpful to my situation or even appropriate for me to ask here. It looks like most people are professionals here and I am definitely not. I looked through many places for insight into my situation. Unfortunately, I did not find much public information so far. So I hope to have better luck here. 

I am self-employed and I have a solo 401k opened in 2019. I opened a defined benefit cash balance plan and a regular 401k this week with a third party administrator. The intention is to roll over the solo 401k fund into the regular 401k and contribute to the DB plan as well for year 2020. 

I just realized that there will be excessive profit sharing for year 2020, because the profit sharing is reduced to 6% due to the cash balance plan. I wonder what options that I have right now to correct the mistake. The solo 401k is at Vanguard and I am told by Vanguard excessive profit sharing is usually treated as contribution for future years. I also need to file Form 5330 and a pay 10% penalty. 

Does it mean I can not close this solo 401k and rollover the fund into the new regular 401k this year, until the excessive profit sharing is resolved? My understanding is the excessive amount may take two more years, given my expected income. At this point, both the DB plan and the solo 401k were already filed with IRS by the third party administrator, but no accounts have been opened anywhere and no money has been contributed. 

Any insight is greatly appreciated. 

You obviously did not get, or did not take, qualified advice from your TPA or failed to disclose all the facts to such party (already funded max PS) before going forward with this arrangement. This is a tax issue and now you need advice from a qualified tax advisor - i.e., your accountant. If you have already contributed more than 6% PS for 2020 then you essentially have a 31% deduction limit for 2020 between the two plans. Again, you need accounting advice, but my non-accountant opinion is that you'll be able to deduct only a portion of your 2020 cash balance contribution for 2020 (which hopefully you haven't deposited yet) and then will need to deduct rest on 2021 return along with as much as legally/actuarially possible of the 2021 cash balance contribution, AND limit your 2021 PS to 6% or less of your eligible compensation, depositing such AFTER year-end and your eligible compensation is known with certainty.

Note, the creation/existence of the CB plan does not make your PS plan deduction limit 6%. How much you already contributed for 2020 PS drives what your total deduction limit will be.

Maybe others will opine differently, but again, this is a tax issue to discuss with your accountant as they are the ones opining on your tax return deduction.

Thank you for your response! I am indeed discussing with my TPA at the moment for solutions. I want to educate myself as well. 

So far, I contributed $16000 as profit sharing in 2020 and another $19500 as elective-deferral. I am not sure whether that will make any difference. 

If your pensionable income is equal to or higher than $266,667 your 401(k) should be fine as the $19,500 401(k) contribution does not go into the 6% calculation for deduction purposes and $16,000 is 6% of $266,667. If you are a corp that will mean your W-2 is $266,667 or higher 2020. If you are schedule C, talk to your TPA about what your earnings for pension purpose are as it can be a bit complicated and circular as every dollar of employer retirement plan contributions will reduce your income by $1. 

But you'll probably want to run through all the numbers with your TPA/actuary and possibly your CPA who probably has a better handle on it with full information.

You do not state this but your question presumes that your CB plan deduction is using up your 25% deduction limit.  If your CB deduction is only 10% of comp, you may not have an issue.  Also, you may be able to amend the CB plan for 2020 in order to reduce the required contribution for 2020.  Finally, why would you need a second 401k?  You already had one, why pay someone to set up a second one?

1 hour ago, Lou S. said:

If your pensionable income is equal to or higher than $266,667 your 401(k) should be fine as the $19,500 401(k) contribution does not go into the 6% calculation for deduction purposes and $16,000 is 6% of $266,667. If you are a corp that will mean your W-2 is $266,667 or higher 2020. If you are schedule C, talk to your TPA about what your earnings for pension purpose are as it can be a bit complicated and circular as every dollar of employer retirement plan contributions will reduce your income by $1. 

But you'll probably want to run through all the numbers with your TPA/actuary and possibly your CPA who probably has a better handle on it with full information.

I am a LLC taxed as a S-corp and my W-2 is less than $266,667. So I will run the numbers with my TPA for sure. Thank you for your inputs. 

2 minutes ago, JackS said:

You do not state this but your question presumes that your CB plan deduction is using up your 25% deduction limit.  If your CB deduction is only 10% of comp, you may not have an issue.  Also, you may be able to amend the CB plan for 2020 in order to reduce the required contribution for 2020.  Finally, why would you need a second 401k?  You already had one, why pay someone to set up a second one?

The reason for a second 401K is that my TBA said the 401k and the DB plan are closely related. She does not want to only manages the DB plan, but blind to the other piece of the puzzle. Plus, the new 401k allows for after-tax contribution and in service distribution, which allow for something called mega backdoor roths. I do not know whether I will take advantage of the function yet, but it seems a nice option to have. 

11 minutes ago, dox3725@gmail.com said:

The reason for a second 401K is that my TBA said the 401k and the DB plan are closely related. She does not want to only manages the DB plan, but blind to the other piece of the puzzle. Plus, the new 401k allows for after-tax contribution and in service distribution, which allow for something called mega backdoor roths. I do not know whether I will take advantage of the function yet, but it seems a nice option to have. 

Your "solo 401k" is a just a 401k plan without employees, and your "regular 401k", is just a 401k plan without employees.  They both file the same 5500-EZ, answering the same questions the same way. There may be some differences in the plan document, but none that would prevent you from adding the same "new" features to the Vanguard plan.  

Based on what you describe above, a new plan was not required.  It is possible that your TPA will only work with their own products, but hopefully it wasn't sold to you as something you were required to do to get this type of a set up (especially when you describe features you don't even know if you will use), and hopefully they did not charge you for things you did not need.  I'm not saying the TPA did anything wrong, there are lots of details we are not aware of, but something feels off to me.

4 hours ago, RatherBeGolfing said:

Your "solo 401k" is a just a 401k plan without employees, and your "regular 401k", is just a 401k plan without employees.  They both file the same 5500-EZ, answering the same questions the same way. There may be some differences in the plan document, but none that would prevent you from adding the same "new" features to the Vanguard plan.  

Based on what you describe above, a new plan was not required.  It is possible that your TPA will only work with their own products, but hopefully it wasn't sold to you as something you were required to do to get this type of a set up (especially when you describe features you don't even know if you will use), and hopefully they did not charge you for things you did not need.  I'm not saying the TPA did anything wrong, there are lots of details we are not aware of, but something feels off to me.

After some further discussions with my TPA, I think my understanding is a little better now, which confirms what you are saying, I think. I am not having a new 401k. It is the same 401k. The TPA is just updating the cookie-cutter plan document Vanguard provided. The new plan document will allow employees (in the future maybe), in-service distribution, and after-tax contribution. My understanding is that the TPA will be able to re-allocate the excessive profit sharing to the DB plan by filing some correction letter. 

3 hours ago, dox3725@gmail.com said:

After some further discussions with my TPA, I think my understanding is a little better now, which confirms what you are saying, I think. I am not having a new 401k. It is the same 401k. The TPA is just updating the cookie-cutter plan document Vanguard provided. The new plan document will allow employees (in the future maybe), in-service distribution, and after-tax contribution. My understanding is that the TPA will be able to re-allocate the excessive profit sharing to the DB plan by filing some correction letter. 

Keep us posted!

10 hours ago, dox3725@gmail.com said:

After some further discussions with my TPA, I think my understanding is a little better now, which confirms what you are saying, I think. I am not having a new 401k. It is the same 401k. The TPA is just updating the cookie-cutter plan document Vanguard provided. The new plan document will allow employees (in the future maybe), in-service distribution, and after-tax contribution. My understanding is that the TPA will be able to re-allocate the excessive profit sharing to the DB plan by filing some correction letter. 

Great!