How to correct an overcontribution for a solo 401K (by employer, which is me as a self-employed person). I made this mistake two days ago. What are penalities and taxes?

Forum|Forum|3 years ago
October 16, 2022
2 replies
24 views

No text available

TurboTax Self Employed Online

Best answer by dmertz

The corrective action is to request that the trustee make a corrective distribution of the excess, adjusted for gain or loss, or to pay a 10% excess contribution penalty with Form 5330 (not supported by TurboTax and apply the excess as some or all of the contribution for the following year. (Note that if contributed in 2022 for 2021, perhaps the contribution can be treated as the permissible amount for 2021 plus some amount for 2022 without treating any of it as excess; check with your 401(k) trustee.)

The Fix-it Guide for elective deferrals is not the correct reference since the excess was an excess employer contribution (Section 404(a)(3)(A)), not an excess elective deferral. The April 15 deadline would not apply. The deadline to obtain a corrective distribution might be the due date of your tax return (the date you file your tax return on extension or October 17, 2022, whichever is earlier), I'm not sure.

A

Anonymous_

Level 15

See https://www.irs.gov/retirement-plans/one-participant-401k-plans

and

https://www.irs.gov/retirement-plans/401k-plan-fix-it-guide-elective-deferrals-werent-limited-to-the-amounts-under-irc-section-402g-for-the-calendar-year-and-excesses-werent-distributed

D

dmertzAnswer

Level 15

The corrective action is to request that the trustee make a corrective distribution of the excess, adjusted for gain or loss, or to pay a 10% excess contribution penalty with Form 5330 (not supported by TurboTax and apply the excess as some or all of the contribution for the following year. (Note that if contributed in 2022 for 2021, perhaps the contribution can be treated as the permissible amount for 2021 plus some amount for 2022 without treating any of it as excess; check with your 401(k) trustee.)

The Fix-it Guide for elective deferrals is not the correct reference since the excess was an excess employer contribution (Section 404(a)(3)(A)), not an excess elective deferral. The April 15 deadline would not apply. The deadline to obtain a corrective distribution might be the due date of your tax return (the date you file your tax return on extension or October 17, 2022, whichever is earlier), I'm not sure.

K

kat2Author

Level 2

Thank you so much! I will contact the trustee as soon as offices open Monday and ask them to make the corrective action.

N

northupl

Level 2

Are there any updates to this response? I have a similar situation and the account custodian has informed me you cannot withdraw to correct but must do the 5330 and pay the excise tax. Appreciate any updates

DaveF1006

Level 15

It depends. Unlike employee deferrals (which have a clear "Return of Excess" mechanism), the IRS does not have a simple, automatic "undo" button for employer (profit-sharing) contributions.

The Custodian's View: Most custodians (Fidelity, Vanguard, etc.) will not process a "Return of Excess" for employer money because it wasn't a "deferral" from a paycheck; it was a business grant to the plan. They don't want the liability of moving money out of a qualified plan without a "distributable event."

The IRS View: Under the Employee Plans Compliance Resolution System (EPCRS), you can technically correct this, but it’s more complex than a standard withdrawal.

The Current Correction Options

Since you made the mistake, you have the following options.

Option A: The "Carryover" (Most Common)

If the overcontribution isn't massive, you simply leave the money in the account and "claim" it as your 2025 contribution (if the mistake was for 2024) or your 2026 contribution.
The Penalty: You must file Form 5330 and pay a 10% excise tax on the excess amount for the year the mistake was made.
The Benefit: It is the "cleanest" path with the least amount of paperwork and no need to fight the custodian. The money stays in the plan and continues to grow tax-deferred.

Option B: Forfeiture to a "Suspense Account"

If your Solo 401(k) plan document allows it, the excess is moved into a "suspense account" within the plan.

This money is then used to satisfy future employer contributions. You still generally owe the 10% excise tax on Form 5330 for the year the "non-deductible" contribution sat there.

Option C: Formal EPCRS Correction (The "Hard Way" and usually not recommended)

Under Revenue Procedure 2021-30, you can use the Self-Correction Program (SCP) to distribute the excess.
The Catch: You must demonstrate that you have "established practices and procedures" and that this was an operational error.
The Problem: Even if the IRS allows it, your custodian might refuse to cut the check. If they won't do it, you are effectively stuck with Option A.

Next Steps

Check your Plan Document: See if it has specific language about "Excess Annual Additions."
Calculate the 10%: If you overcontributed by $1,000, your penalty is $100. For many, paying the $100 is cheaper and easier than the administrative headache of a forced distribution.
Adjust next year's budget: Ensure you reduce your intended 2026 employer contributions by the amount of the current excess.

**Say "Thanks" by clicking the thumb icon in a post. **Mark the post that answers your question by clicking on "Mark as Best Answer"