Public Service Announcement - Solo 401k - Created After Jan 1 For Previous Year - Clarification from Congress - Employee

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Soon2BXProgrammer
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Public Service Announcement - Solo 401k - Created After Jan 1 For Previous Year - Clarification from Congress - Employee

Post by Soon2BXProgrammer »

The Secure Act (current law) allows for 401k plans to be created after the plan year but still allow contributions (employER). People in the forums have been going back and forth about are "employEE" contributions allowed.

I have argued that they shouldn't be.

We have received clarification that they are not allowed, unless the plan was created in the previous year and the person elected the contributions.

How so? Well we received it in a round about way from congress:
Section 320, Retroactive first year elective deferrals for sole proprietors. Under the
SECURE Act, an employer may establish a new 401(k) plan after the end of the taxable year, but
before the employer’s tax filing date and treat the plan as having been established on the last day
of the taxable year. Such plans may be funded by employer contributions up to the employer’s
tax filing date. Section 320 allows these plans, when they are sponsored by sole proprietors or
single-member LLCs, to receive employee contributions up to the date of the employee’s tax
return filing date for the initial year.
There is no reason that Congress would add this ability, unless they had been told that this is a gap in their Secure Act legislation. (current law)

This is from the Secure Act 2.0: https://gop-waysandmeans.house.gov/wp-c ... 3.21-1.pdf

Note: this thread is not to discuss the future legislation, however it uses the future legislation as a policy stance on the meaning of the current law.
Last edited by Soon2BXProgrammer on Sun May 09, 2021 11:32 am, edited 2 times in total.
Earned 43 (and counting) credit hours of financial planning related education from a regionally accredited university, but I am not your advisor.
Topic Author
Soon2BXProgrammer
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Re: Public Service Announcement - Solo 401k - Created After Jan 1 For Previous Year - Clarification from Congress - Empl

Post by Soon2BXProgrammer »

johnpau wrote: Mon Mar 22, 2021 11:06 pm While the 2019 SECURE Act extended the deadline to open a Solo 401k plan from the end of the year(12/31) to the business tax return deadline (04/15) including any timely filed extension.

So was able to open Vanguard Solo(401k) account in 03/2021 to make contributions for year 2020.

We can make 2020 employER contribution into solo(401k) until 04/15/2021 (or) the new deadline 05/17/2021.

When I login to my Vanguard solo 401K account and tried to see if I can contribute as an employEE for year 2020, it was giving me an option,
wondering if we can contribute as employEE for the year 2020 until 04/15/2021 ?


Does anyone know if we can do employEE contribution for prior year 2020 before 04/15/2021 (or) is it only employER contribution allowed for prior year ?

I'm a sole proprietorship ( no employees). No legal entity registered. Doing business/Assumed business name.
No its not allowed. See first post in this thread.
Earned 43 (and counting) credit hours of financial planning related education from a regionally accredited university, but I am not your advisor.
Topic Author
Soon2BXProgrammer
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Re: Public Service Announcement - Solo 401k - Created After Jan 1 For Previous Year - Clarification from Congress - Empl

Post by Soon2BXProgrammer »

lucha wrote: Wed Mar 10, 2021 2:24 pm I'm reading a lot of conflicting stuff online. Apparently the rules about 401k creation dates changed just last year due to COVID and you can now open up a solo 401k until April 15, 2021 that counts for 2020.

Some sources say that you can make employee AND employer contributions to it until April 15.

Others say the employee deadline was Dec 31 but the employer deadline is April 15 >> this defeats the purpose if there needs to be an employee contribution to be able to make an employer contribution, if you never made the employee contribution before you even established the solo 401k.

I'm a sole proprietor if that helps.
See first post in this thread.
Earned 43 (and counting) credit hours of financial planning related education from a regionally accredited university, but I am not your advisor.
Topic Author
Soon2BXProgrammer
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Re: Public Service Announcement - Solo 401k - Created After Jan 1 For Previous Year - Clarification from Congress - Empl

Post by Soon2BXProgrammer »

Alan S. wrote:Sat May 08, 2021 6:55 pm Ping
Just thought you'd be interested in this clarification.
Earned 43 (and counting) credit hours of financial planning related education from a regionally accredited university, but I am not your advisor.
Topic Author
Soon2BXProgrammer
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Re: Public Service Announcement - Solo 401k - Created After Jan 1 For Previous Year - Clarification from Congress - Empl

Post by Soon2BXProgrammer »

lucha wrote: Tue Mar 23, 2021 12:14 am
SuzBanyan wrote: Mon Mar 22, 2021 5:10 pm
Ben B wrote: Mon Mar 22, 2021 4:58 pm I think 401k cannot be setup for a previous calendar year. Maybe you can do a SEP
After the Secure Act, passed in late 2019, a Solo 301k can now be set up anytime before the tax-filing deadline.
I just did it at VG a few weeks ago. We set it up for 2020. I can still make both employer contribution (to the i401k) and employee contribution (to either my i401k or my Roth 401k).
See first post in thread.
Earned 43 (and counting) credit hours of financial planning related education from a regionally accredited university, but I am not your advisor.
Topic Author
Soon2BXProgrammer
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Re: Public Service Announcement - Solo 401k - Created After Jan 1 For Previous Year - Clarification from Congress - Empl

Post by Soon2BXProgrammer »

Spirit Rider wrote:Sat Sep 28, 2019 3:34 pm Ping
Thought you might be interested in this.
Earned 43 (and counting) credit hours of financial planning related education from a regionally accredited university, but I am not your advisor.
lucha
Posts: 155
Joined: Sat Feb 27, 2021 6:33 pm

Re: Public Service Announcement - Solo 401k - Created After Jan 1 For Previous Year - Clarification from Congress - Empl

Post by lucha »

Soon2BXProgrammer wrote: Sun May 09, 2021 11:10 am
lucha wrote: Wed Mar 10, 2021 2:24 pm I'm reading a lot of conflicting stuff online. Apparently the rules about 401k creation dates changed just last year due to COVID and you can now open up a solo 401k until April 15, 2021 that counts for 2020.

Some sources say that you can make employee AND employer contributions to it until April 15.

Others say the employee deadline was Dec 31 but the employer deadline is April 15 >> this defeats the purpose if there needs to be an employee contribution to be able to make an employer contribution, if you never made the employee contribution before you even established the solo 401k.

I'm a sole proprietor if that helps.
See first post in this thread.
Thanks for the headsup. But I'm re-reading the original post and I'm still seeing that a sole proprietor can make the employee contribution as well. Am I missing something??

Section 320, Retroactive first year elective deferrals for sole proprietors. Under the
SECURE Act, an employer may establish a new 401(k) plan after the end of the taxable year, but
before the employer’s tax filing date and treat the plan as having been established on the last day
of the taxable year. Such plans may be funded by employer contributions up to the employer’s
tax filing date. Section 320 allows these plans, when they are sponsored by sole proprietors or
single-member LLCs, to receive employee contributions up to the date of the employee’s tax
return filing date for the initial year.
Topic Author
Soon2BXProgrammer
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Re: Public Service Announcement - Solo 401k - Created After Jan 1 For Previous Year - Clarification from Congress - Empl

Post by Soon2BXProgrammer »

lucha wrote: Sun May 09, 2021 11:19 pm
Thanks for the headsup. But I'm re-reading the original post and I'm still seeing that a sole proprietor can make the employee contribution as well. Am I missing something??

Section 320, Retroactive first year elective deferrals for sole proprietors. Under the
SECURE Act, an employer may establish a new 401(k) plan after the end of the taxable year, but
before the employer’s tax filing date and treat the plan as having been established on the last day
of the taxable year. Such plans may be funded by employer contributions up to the employer’s
tax filing date. Section 320 allows these plans, when they are sponsored by sole proprietors or
single-member LLCs, to receive employee contributions up to the date of the employee’s tax
return filing date for the initial year.
This is the summary of the "yet to be passed, pending legislation" i.e. NOT current law. So if Congress is being told they need to explicitly sate that Sole Props / Single member LLC's can make EmployEE contributions for the previous year up to the return filing date for this initial year (just like they can for a plan that has been previously established with contributions elected before the calendar year end)… What does this mean?

To me, this means that you can't.

Schedule C business have special rules that allow them to make EmployEE contributions for the owners after the year. They still have to have a written election of what they want to do, but because they don't have everything done from a tax perspective to figure out what they can contribute until after the year closes, is why they can make EmployEE contributions after the end of the year for established plans... If you are a S Corp, then you have to make your EmployEE contributions out of payroll before the end of the calendar year.

Basically this proposed legislation is trying to cover the gap in the law they created with the Secure ACT, that they forgot that they need to tweak the special rules for Schedule C businesses to allow EmployEE contributions in addition to EmployER contributions for this first initial year of plan adoption.
Earned 43 (and counting) credit hours of financial planning related education from a regionally accredited university, but I am not your advisor.
terran
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Re: Public Service Announcement - Solo 401k - Created After Jan 1 For Previous Year - Clarification from Congress - Empl

Post by terran »

Thanks for this Soon2BXProgrammer, it's a very creative idea to use proposed legislation to clarify current law, and completely makes sense. I just edited my reply to another thread on the topic to point here. Clearly lawmakers should be posting on Bogleheads for help with these laws -- I'm sure we would have asked about this oversight and they could have gotten it right the first time around.
Topic Author
Soon2BXProgrammer
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Re: Public Service Announcement - Solo 401k - Created After Jan 1 For Previous Year - Clarification from Congress - Empl

Post by Soon2BXProgrammer »

terran wrote: Mon May 10, 2021 9:47 am Thanks for this Soon2BXProgrammer, it's a very creative idea to use proposed legislation to clarify current law, and completely makes sense. I just edited my reply to another thread on the topic to point here. Clearly lawmakers should be posting on Bogleheads for help with these laws -- I'm sure we would have asked about this oversight and they could have gotten it right the first time around.
Your welcome, and I agree.
Earned 43 (and counting) credit hours of financial planning related education from a regionally accredited university, but I am not your advisor.
lucha
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Re: Public Service Announcement - Solo 401k - Created After Jan 1 For Previous Year - Clarification from Congress - Empl

Post by lucha »

Soon2BXProgrammer wrote: Mon May 10, 2021 8:22 am
lucha wrote: Sun May 09, 2021 11:19 pm
Thanks for the headsup. But I'm re-reading the original post and I'm still seeing that a sole proprietor can make the employee contribution as well. Am I missing something??

Section 320, Retroactive first year elective deferrals for sole proprietors. Under the
SECURE Act, an employer may establish a new 401(k) plan after the end of the taxable year, but
before the employer’s tax filing date and treat the plan as having been established on the last day
of the taxable year. Such plans may be funded by employer contributions up to the employer’s
tax filing date. Section 320 allows these plans, when they are sponsored by sole proprietors or
single-member LLCs, to receive employee contributions up to the date of the employee’s tax
return filing date for the initial year.
This is the summary of the "yet to be passed, pending legislation" i.e. NOT current law. So if Congress is being told they need to explicitly sate that Sole Props / Single member LLC's can make EmployEE contributions for the previous year up to the return filing date for this initial year (just like they can for a plan that has been previously established with contributions elected before the calendar year end)… What does this mean?

To me, this means that you can't.
OK, but to Vanguard, who has an entire compliance department dedicated to making sure they are in compliance, they said I could open an account for the year 2020 after the new year had passed, and they allowed me to make my employee and employer contributions as a sole proprietor. So should I call them and tell they they were wrong? (sorry if I sound snarky just trying to figure out next steps if I need to be worried about this)
harikaried
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Re: Public Service Announcement - Solo 401k - Created After Jan 1 For Previous Year - Clarification from Congress - Empl

Post by harikaried »

lucha wrote: Wed May 12, 2021 11:47 pmOK, but to Vanguard, who has an entire compliance department dedicated to making sure they are in compliance, they said I could open an account for the year 2020 after the new year had passed, and they allowed me to make my employee and employer contributions as a sole proprietor.
Potentially some Solo 401k plan documents already allow for employee elective deferral for the previous year even under current law. IRS Publication 560 has a section "When Contributions Are Considered Made":
You generally apply your plan contributions to the year in which you make them. But you can apply them to the previous year if all the following requirements are met.
  1. You make them by the due date of your tax return for the previous year (plus extensions).
  2. The plan was established by the end of the previous year.
  3. The plan treats the contributions as though it had received them on the last day of the previous year.
  4. You do either of the following.
    1. You specify in writing to the plan administrator or trustee that the contributions apply to the previous year.
    2. You deduct the contributions on your tax return for the previous year. A partnership shows contributions for partners on Form 1065.
The wording for item 2 seems to match up with "Under the SECURE Act, an employer may establish a new 401(k) plan after the end of the taxable year, but before the employer’s tax filing date and treat the plan as having been established on the last day of the taxable year." So then the next question is whether the plan allows for it and treats things appropriately.

Vanguard Individual 401(k) - Basic Plan Document
Fidelity Defined Contribution Retirement Plan - Basic Plan Document No. 04
Topic Author
Soon2BXProgrammer
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Re: Public Service Announcement - Solo 401k - Created After Jan 1 For Previous Year - Clarification from Congress - Empl

Post by Soon2BXProgrammer »

lucha wrote: Wed May 12, 2021 11:47 pm
Soon2BXProgrammer wrote: Mon May 10, 2021 8:22 am
lucha wrote: Sun May 09, 2021 11:19 pm
Thanks for the headsup. But I'm re-reading the original post and I'm still seeing that a sole proprietor can make the employee contribution as well. Am I missing something??

Section 320, Retroactive first year elective deferrals for sole proprietors. Under the
SECURE Act, an employer may establish a new 401(k) plan after the end of the taxable year, but
before the employer’s tax filing date and treat the plan as having been established on the last day
of the taxable year. Such plans may be funded by employer contributions up to the employer’s
tax filing date. Section 320 allows these plans, when they are sponsored by sole proprietors or
single-member LLCs, to receive employee contributions up to the date of the employee’s tax
return filing date for the initial year.
This is the summary of the "yet to be passed, pending legislation" i.e. NOT current law. So if Congress is being told they need to explicitly sate that Sole Props / Single member LLC's can make EmployEE contributions for the previous year up to the return filing date for this initial year (just like they can for a plan that has been previously established with contributions elected before the calendar year end)… What does this mean?

To me, this means that you can't.
OK, but to Vanguard, who has an entire compliance department dedicated to making sure they are in compliance, they said I could open an account for the year 2020 after the new year had passed, and they allowed me to make my employee and employer contributions as a sole proprietor. So should I call them and tell they they were wrong? (sorry if I sound snarky just trying to figure out next steps if I need to be worried about this)
If i was in your shoes, i would ask Vanguard if they got it right, based on pending Secure Act 2.0 Section 320 legislation.. Why is congress explicitly allowing employEE contributions for my situation if Vanguard is saying it was already allowed. Congress hadn't created the proposed law when Vanguard made their original decision.

Then i'd probably let it go. and if no one complains, then fine.
Earned 43 (and counting) credit hours of financial planning related education from a regionally accredited university, but I am not your advisor.
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