Excess Solo 401K Employer Contribution for 2019 tax year

[zappohll]

Help!

Background:  I'm self-employed (only employee) with a Schedule C business, and have both a Solo 401K plan and Solo Defined Benefit Retirement Plan.   For the 2019 tax year I maxed out the Solo 401K contributions with an Employee contribution of $25K ($19K + $6K catch up), plus an Employer Contribution (Profit Sharing) of $37K, for a total of $62K.  All contributions were made in April 2020 for the 2019 tax year, and I just filed my 2019 return.

Problem:  I just learned that with both a Solo 401K and Defined Benefit Plan, the Employer Contribution should be limited to 6% of my self-employed income, so my Employer Contribution (Profit Sharing) contribution is too high for 2019.

Question:  How do I request a return of the excess Employer Contribution from my Solo 401K in compliance with IRS rules?  I just made the contributions 3 weeks ago. I don't want to be hit with an excise tax for contributing too much.

Thanks in advance for any insight / recommendations!!

[VictoriaD75]

You will need to contact your plan administrator to withdraw the excess contribution. Have you already filed your return? If not, simply adjust the amount of your contribution reported prior to filing. If you have, you may want to amend, as you would have withdrawn the amount prior to the filing deadline. 

[zappohll]

Hi Victoria,

Thanks...I've already submitted my 2019 tax return, so I'll need to file an amended return.

Do you know if there is a particular IRS rule that permits me to withdraw this contribution?   The 401K institution is telling me that withdrawals are not supported.

Many thanks!

[dox]

I am in the same boat now. Have you found a solution yet? 

[zappohll]

Yes, I was able to solve the issue.

I wrote a Letter of Instruction is to correct a IRC 404(a)(7) excess annual contribution.

When withdrawing the excess contribution, any Gain between when the contribution was made and when you withdraw the excess will be taxable.

See calculations on IRS Form 590A, Worksheet 1-3, pg 30.

Once this was completed with the 401K administrator, I filed an amended tax return.

Hope this helps!!! 

[dox]

Thank you very much for your super quick response. Let me look into it. 

In other words, you are able refund the excesssive amount back to the business by writing "Letter of Instruction"? 

Thanks again. 

[zappohll]

Hi

I spoke to my 401K Financial Institution first. 

The Letter Of Instruction stated that I was correcting a IRC 404(a)(7) excess annual contribution. 

In the letter, I specified how much I had originally contributed, and the date of contribution, and the reason for the excess contribution.   I also specified the amount that should be removed from the account as an Excess Contribution.

I also specified that this request is made in accordance with IRS EPCRS SCP (Self Correcting Program).

I then calculated the earnings on the excess contribution which also were to be removed.   The calculation is documented in IRS Form 590A, Worksheet 1-3, pg 30.  

In my case, I removed the Excess Contribution 2 weeks after it was made, and the change in value was only $33...so I removed $33 more than the excess contribution to adjust for the small gain in those 2 weeks.

Since I also had a non-retirement account at the same financial institution, the requested amount was moved from the 401K to the non-retirement account.

Hope this helps...good luck!

[dox]

This is tremendously helpful. I will try to follow your example to do the same. 

Thank you!