Difficulty-of-care payments for IRA Contributions Not Solo 401k Contributions

QUESTION: I am a paid caregiver for my son. I receive $70K in non-taxable difficulty of care payments as a 1099 paid to me through an agency. I would like to save and invest these funds for my son’s future adult care.

In researching how I can legally put this annual income into a Roth 401K, I found your website and your Mega Backdoor Roth Strategy — is this information about all the steps to take still current and recommended for someone in my position?

ANSWER:

You don’t appear to qualify for a solo 401k plan.

The relevant law, and why it’s narrower than it sounds

The provision that lets difficulty-of-care payments (excluded from gross income under IRC §131) count toward retirement contributions came from Section 116 of the original SECURE Act (2019) — not SECURE 2.0. It amended two different code sections in two different ways:

IRC §408(o) — lets you treat difficulty-of-care payments as compensation for IRA contribution purposes (Roth or traditional), even though the income itself is nontaxable.

IRC §415(c) — lets difficulty-of-care payments count as compensation for employer-plan contribution limits, but the IRS clarified in Notice 2020-68 that this only works when the payments are made by the employer that sponsors the plan to its own employee. Payments from someone other than that employer don’t qualify.

Why this likely rules out the Solo 401(k) mega backdoor Roth route

A Solo 401(k) is funded based on net earnings from self-employment under IRC §401(c)/§1402 — a different definitional pathway entirely from either provision above. The SECURE Act fix never touched that self-employment-earnings definition. Since difficulty-of-care payments are excluded from gross income (and generally don’t generate self-employment tax liability), they typically don’t produce the “net self-employment earnings” a Solo 401(k) needs as its contribution base — for either the employee deferral, the employer contribution, or after-tax mega-backdoor contributions.

There’s also the agency/1099 structure to consider: the §415(c) fix only helps if you’re a common-law employee of an entity that both pays you the difficulty-of-care wages and sponsors a plan for you. Being paid on a 1099 through an agency points toward independent contractor treatment, which puts you outside that employer-plan pathway anyway.

What likely does work

The §408(o) fix is built for exactly your situation — a family caregiver receiving nontaxable difficulty-of-care payments — but it only unlocks IRA contributions, not a 401(k)/mega-backdoor structure. At 52, that means a Roth or traditional IRA up to the standard annual limit (roughly $8,000 for 2025 with the 50+ catch-up, similarly indexed for 2026) — a small fraction of the $70K you’re hoping to shelter.

Given the stakes here, I’d treat any “Mega Backdoor Roth for difficulty-of-care income” claim with real skepticism until a CPA or ERISA attorney familiar with Medicaid waiver/difficulty-of-care payment issues confirms it against your exact facts (whether you’re a W-2 employee of the agency or an independent contractor, and whether the agency itself sponsors any plan). If the larger goal is building a long-term fund for your son’s care, it may be worth exploring purpose-built vehicles for that instead — like an ABLE account or a special needs trust — alongside whatever modest IRA contribution you can make from this income.