SE solo 401(k) foulup

[joanmcq]

SP did his own calculation for his solo 401(k) (thought software was calculating it wrong) and we found this out when audited for another issue. Overcontributed for 2006 for about 7K. I am reading that if an overcontribution is not fixed within a year, the plan is disqualified for the year the overcontribution was made and remains so until the overcontribution is removed. However, the only info I could find was on overcontributions due to highly compensated employees, and not in regards to a solo K. Does the whole deduction become taxable (we are talking over 42K here), or does he get a penalty or both? He also has a SEP, but did not contribute to the SEP in 2006. He did not contribute to the 401K in 2007 or so far in 2008. Does having two retirement plans concurrently pose any problems?

[jainen]

>>the only info I could find was on overcontributions due to highly compensated employees, and not in regards to a solo K<<

The definition of highly compensated employee includes ownership as well as compensation.

[joanmcq]

He is the only person; its a solo 401(k) for a Sch C. He tweaked the program calculation to fit what he thought was the max he could contribute, but overccontributed to the er portion by 5%. Highly compensated isn't the issue; the fact is he used the employee percentage of contribution instead of the SE rate, and didn't subtract the SE tax deduction from the net income to calculate the max contribution either. So he's got about 7K extra and its been in there since 4/15/07 for tax year 2006. What happens?

[Lion EA]

I haven't worked with solo 401(k)s, so haven't researched the rules. But, for some other retirement plans, over contributions can stay in and be part of the following year's calculation; plus a penalty during the "over" years until the contribution is allowed. So, it's worth some research on your part to see if maybe he has a penalty for 2006 but it all got absorbed in 2007 with further penalties. Lay out what he contributed when and for which years for both his 401(k) and his SEP so you can see if 2006 is the only problem.

[joanmcq]

Does anyone else have a comment on this??? I am trying to advise this guy, but I can't figure if the whole plan is now whacked or if he can move the overcontribution to 2008 and save the rest.