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Timing of SIMPLE deferrals for the self-employed


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A sole-proprietor (with no employees) set up (I think) a SIMPLE plan during 2001, in which they deferred $250, and nothing else. A call today asks if they can make additional deferrals before April 15 and deduct them on their 2001 Form 1040, as well as making the 3% matching contribution on a higher level of contributions.

I can't find the answer in the SIMPLE answer book, but my feeling is that the elective contributions must be made before the end of the calendar year. Am I right?

Thanks for any answers.

[see below; also see, SIMPLE, SEP, and SARSEP Answer Book Q 4:26 (7th Ed), Q 4:32 (6th Ed). I will add a cross reference or another question in chapter 14. Thank you.)

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The conservative answer to your question is January 30th, because "deferrals" need to be invested by the 30th day following the month in which the "deferral" was for, and December is the last month of a sole proprietor's tax year. Now the question is, does the 30 day rule apply to sole proprietors? I called an office and no one could tell me.

IRS Pub. 560 on page 9 talks about the 30 day rule, but does not say whether this includes sole proprietors. Then on page 10 there is an example of a sole proprietor making a contribution by tax filing deadline, but it is not clear as to what type of contribution ("deferral" and/or employer component).

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While earned income is deemed earned on the last day of the fiscal year, it is possible that it is not determined until a latter date. [The election to defer, however, MUST be in place by 12 p.m. on the last day of the business's taxable year, generally December 31.] Thus, the elective amount, in the case of a self-employed individual, may be contributed after the end of the year. Also the 15 day rule for a SIMPLE IRA is NOT a safe harbor if segregation could occur earlier.

When the plan asset regulations were proposed, two comments were received by the DOL relating to when contributions by partners become plan assets. Those letters asserted that a partner's compensation is deemed currently available on the last day of the taxable year and that an individual partner must make an election by the last day of the year. In the view of the DOL, under the final regulations, the monies that are to go to a qualified 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. [Emphasis added] [Preamble, ERISA § 2510.3-102]

It is unclear to what extent a sole proprietor could rely on those regulations. IF the DOLs comments are based on partnership taxation rules, then to that extent, they might not apply to a sole proprietor (but, IMO, I think they would). The following example explains how this rule might apply in a typical related situation.

Example. The Able-7 Partnership maintains a SARSEP (15-day DOL rule). On December 31, 1999, the last day of its taxable and plan year, all the partners individually elect to defer the maximum amount into their SARSEP-IRAs (not to exceed $10,000 per person). During the year, each partner had a monthly draw of $2,000 cash against eventual earnings. The firm's accountant is ill and will not be able to compute Able-7's net earnings by the due date of Able-7's return and therefore files for an extension of behalf of the partnership and each of the partners. On June 27, the partnership is notified by its accountant that it indeed had a profit and that each of the partners is due an additional $37,000. Able-7 must deposit $70,000 as contributions to the SARSEP-IRAs of its seven partners as soon as the amounts can reasonably be segregated from the partnership's general assets, but no later than 15 business days after the end of the month of June. For deduction purposes, the amounts must be deposited by July 17, 2000, the extended due date of Able-7's 1999 return.

Hope this helps.

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