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Contribution deadline...


K-t-F

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New solo 401k plan... SE individual establishing the plan... When does he (she) have to have the deferral contribution paid to the newly established trust?

As-soon-as administrativly possible?

Within 15 days of the year end? (Jan 15)

Schedule C filers may not know exactly what they have for income before year end.

Its not easy being green

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PATA - Don't give up too soon. For some of us the job comes first and reading and sometines answering posts on the message boards is just some kind of sick hobby (although a great way to learn in this business!).

To answer your question, the deferral contribution should be deposited to the trust "as soon as administratively possible". With a sole prop. the compensation for plan purposes is "earned income" which usually is determined after the close of the year. So, once the earned income is determined, the clock starts on the DOL's timing standards.

It is important to note that the election to defer has to happen before the income becomes "currently available" which for Sole Prop's and Partners happens on the last day of the tax year. So, make sure the election to defer is done before the end of the year. Then make the deposit as soon as you can after earned income is determined.

There is a nice discussion of this in Chapter 11, Part C(1)(f) of the 2003 version of the Erisa Outline. Pay particular attention to C(1)(f)(4). ;)

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I certainly understand that the job comes first. This time of year when people are planning especially. I was simply trying to prompt someone to respond and confirm what I thought the answer was. :rolleyes:

I appreciate the ref.

Its not easy being green

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I was researching the same question and found this Q&A on the message board from a year ago:

Must a sole proprietor who has (or is interested in setting up) a "Uni-K" plan have their elective deferrals made by December 31? I seem to remember reading somewhere that the elective deferrals can be made up through the due date of the tax return. Any help would be appreciated!

rmeigs Posted: Dec 30 2002, 03:44 PM

My understanding is that Solo(k) plans are no different than any other 401(k). In brief, employee (in this case the sole proprietor) salary deferral contributions must be made by December 31st. Employer contributions can be made up through the due date of the tax return, plus extensions.

Correct me if I'm wrong on this.

--------------------

Rick Meigs

http://www.401kHelpCenter.Com

As a follow-up, here is a Q&A from the Bisys Individual(k) plan site:

Q. What is the deadline to make an employee salary deferral election?

If you are the owner of an unincorporated business (i.e., sole proprietor or partner), you must generally make a written employee salary deferral election (specifying the amount of your intended employee salary deferral) by no later than the last day of your tax year.

If your business is incorporated, you must generally make a written employee salary deferral election (specifying the amount of your intended employee salary deferral) before the compensation is currently available or paid to you.

Q. What is the deadline for funding my Individual(k) plan?

The deadline for funding the profit sharing portion of your Individual(k) plan is your business tax return due date, including extensions. The deadline for depositing employee salary deferrals depends on whether or not your business is incorporated.

If you are an unincorporated business owner (i.e., a sole proprietor or partner), the deadline for depositing your employee salary deferrals is your business tax return due date, including extensions.

If your business is incorporated, conservatively, the deadline for depositing employee salary deferrals is the earliest date on which the deferrals can be reasonably segregated from your business's general assets, and no later than the 15th business day of the month following the month in which the deferrals are withheld.

--------------------

Rick Meigs

http://www.401kHelpCenter.Com

pmacduff Posted: Dec 30 2002, 04:20 PM

I want to make sure I follow this...the self-employed person must make their election to defer by December 31st...but the actual deposit of $ can be made up until April 15th plus extensions? Are there any cites about this? I have found many references to the election being made by 12/31, but no references to the actual deposit of deferral $. Any info is appreciated...

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That is interesting....

If you are an unincorporated business owner (i.e., a sole proprietor or partner), the deadline for depositing your employee salary deferrals is your business tax return due date, including extensions.

I wonder if the thinking is that the only person to lose out on possible income (or loss) earned on the $ deferred is the plan sponsor themself. No cite though. Something to hang your hat on is always nice!

Its not easy being green

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In my opinion you should have deferrals deposited sometime in January. I do not think it is prudent to wait until the due date of the tax return. I base my conclusions on the following sources:

Department of Labor

Pension and Welfare Benefits Administration

29 CFR Part 2510

Regulation Relating to Definition of "Plan Assets"--Participant Contributions; Final Rule DEPARTMENT OF LABOR Pension and Welfare Benefits Administration 29 CFR Part 2510 RIN 1210-AA53 The preamble is reproduced below

c. Partnerships

Two comments were received relating to when contributions by partners to section 401(k) plans become plan assets. The letters represent that, under 26 CFR 1.401(k)-1(a)(6)(ii), a partner's compensation is deemed currently available on the last day of the taxable year, and an individual partner must make an election by the last day of the year. They ask when the monies, which otherwise would be paid to a partner, but for the partner's election, become plan assets, inasmuch as partners do not receive wages. In the view of the Department, the monies which are to go to a section 401(k) plan by virtue of a partner's election become plan assets at the earliest date they can reasonably be segregated from the partnership's general assets after those monies would otherwise have been distributed to the partner, but no later than 15 business days after the month in which those monies would, but for the election, have been distributed to the partner.

From the Pension Actuaries and Consultants Conference in Washington, D.C., on October 9, 1997:

ASPA: If a sole proprietor or partner is deemed to earn income only on 12/31, what is the implication of elective deferrals made by the partner during the year prior to 12/31? Is a sole proprietor or partner deemed to earn all their income in one day for all purposes?

IRS: Their income is actually earned throughout the year, regardless of the fact that it is DEEMED to be earned at year end. Thus, contributions can be made during the year, but this is done at the peril that the amount deferred as a percentage of pay is unknown until the year end and could result in problems.

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Pata

Re: " No cite though. Something to hang your hat on is always nice! "

The post stated " here is a Q&A from the Bisys Individual(k) plan site:" I read it and then looked at the Bisys site to see what they cited to support the quote given by the poster. The site is loaded with information and cites. I would never have expected a poster giving a quote from someone else to also give the cites that the person making the quote used. That is asking much too much telling me where the quote came from is enough. It was very easy to look it up myself.

George D. Burns

Cost Reduction Strategies

Burns and Associates, Inc

www.costreductionstrategies.com(under construction)

www.employeebenefitsstrategies.com(under construction)

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I did not go to the Bisys site before I wrote that post. I have since been there. I only "ASSumed" that the quote would have included the cite and since there was a question regarding a cite I made my own apparent erroneous conclusion. Being a newcomer to actually positing here I have learned now that not everypost will include all of the information and that in some cases deeper digging may be needed.

Its not easy being green

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Except you didn't find a cite supporting the specific statement that: "If you are an unincorporated business owner (i.e., a sole proprietor or partner), the deadline for depositing your employee salary deferrals is your business tax return due date, including extensions.", did you?

Hardly seems irrational to indicate that no cite exists when no cite exists. Unless, of course, a cite exists. Does it?

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I am not going to find the cite, but if you look at the labor regulations for the definition of an employee benefit plan for purposes of Title I of ERISA you will find that this does not include a plan that only covers an owner or an owner and his or her spouse. Since the plan asset regulations (and the soon as administratively feasible requirement) come from Title I, then it would seem that such a Plan can ignore these regulations and you only need to pay attention to the 404 deductibility rules--the tax return date.

The defintion of employee benefit plan makes clear, however, that if you have an employee in addition to the owner, the entire plan is an employee benefit plan and therefore I would think that the deadline for everyone falls under the provisions of the plan asset regulations.

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Not everything has a cite. For example there is no cite in the IRC or the Treas Regs that states " An employer may use a 401(k) Plan from Fidelity". Certain things are obvious and need no cites.

IRS Publication 560 on page 3 states under the heading "Last Date for Contribution" for Simple 401(k) that it is the due date of employer's return (including extensions) and for Qualified Plans, Due date of employer's retun (including extensions). The IRS gives no cites.

George D. Burns

Cost Reduction Strategies

Burns and Associates, Inc

www.costreductionstrategies.com(under construction)

www.employeebenefitsstrategies.com(under construction)

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The question of whether a retirement plan that covers both a sole owner and common law employees protects the owner's benefits as an employee under ERISA will be argued before the US Supreme Ct this term. The Ct will review a decision of the 6th circuit, In re Yates, 287 F3d 521, that a sole shareholder of a corporation with common law employees was not an employee under ERISA entitiled to protection from creditor's claims under Paterson v. Schumate.

In many partnerships the amount of the partners draws cannot be determined until well after the end of the firms's tax year which delays the contribution of the deferrals to the plan. The actual salary reduction contribution may not be made until the date for filing the partnership's tax return.

mjb

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Interesting thread. I think KJohnson is on the right track, at least on a theoretical level. But if you take the more conservative approach and assume that the IRS/DOL wouldn't agree, and that this should be treated as being subject to these requirements, it seems unlikely that the deadline for an unincorporated sole prop should be any sooner than for an unincorporated partnership. If you then look at the preamble to Treasury Reg 2510.3-102, as referenced by Archimage, I would conclude that you do have until the earliest date they can be reasonably segregated AFTER those monies would otherwise have been distributed to the partner. And wouldn't the date they would "otherwise have been distributed" depend upon when the tax return is completed? I don't agree with the conclusion that they must be deposited by the end of January - I don't read the language of the preamble to require this.

In the view of the Department, the monies which are to go to a section 401(k) plan by virtue of a partner's election become plan assets at the earliest date they can reasonably be segregated from the partnership's general assets after those monies would otherwise have been distributed to the partner, but no later than 15 business days after the month in which those monies would, but for the election, have been distributed to the partner.

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In additon to the Yates case that will be reviewed by the US Supreme Ct, the US. District ct for the Eastern district of NY recently ruled that a physican who was the owner and shareholder of a three person medical corp was not an employee under ERISA for the purpose of the claiming disability benefits, even though the disability policies were governed by ERISA. Pearl v. Monarch Life Ins. Co., No 03-CV-2788, 10/30/03. The Ct rejected the decisions of the 6th, 8th, 10th and 11th circuits that owners with employees are are protected by ERISA and instead excluded the owner because he was not a common law employee within the meaning of ERISA since he could not be hired or fired, had no superior, supervised his own work and had at least 1/3rd influence on his organization. This decison acknowledges that that a plan may be subject to ERISA even though the owner is not an employee for ERISA purposes.

mjb

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