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Timing of Deferral deposits for Self employeds

Guest rffahey

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Guest rffahey

When do "deferrals" have to be deposited for a SIMPLE IRA for a self employed individual who has no "salary"?

Is it April 15 like 401K's or January 31.

The fund companies do not want to say much on this topic.

{{That is because there is no official guidance on the issue. See discussion below -- by gsl}} :ph34r:

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This is from the 2000 Q&A's with the IRS at the ASPA conference:

12. Q. A question arises for a sole proprietor with no employees.

When must a Simple IRA Plan be funded. CPA and I agree the 3% "employer" contribution may be deposited up to the date the tax return is due, including extensions. He believes the "employee" $6,000 must be funded by January 30 (ie within 30 day of the plan year end.) His primary source is the instructions on page 9 of the Pub 560. However it may be later than 1/31 before we know if there is ample SE income to fund such amount.

A. The statute appears clear that it must be funded by 1/30.

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There is no safe harbor. Perhaps it is not all that clear. Under the Code there is a 30-day period. Under DOL rules (i.e., ERISA), however, the 30-day period is NOT a safe harbor if the assets could have reasonably be segregated from the employer's general assets any sooner. [DOL Reg 2510.3-102] As noted, deduction rules differ.

Partners may have a longer period. [see, DOL Reg 2510.3-102, Preamble] and may even pre-pay based on their "advance payments" (assuming ultimately that their EI can support the contribution)(see PLR 200247052; which neither included or excluded sole-proprietors from its "advance payment" application).

A sole proprietor has nothing to hang his/her hat on for making a contribution later than the earlier of 30-day period or the date the assets could have been reasonably be segregated from the employer's general assets.

It is my understanding that the justification for the materials in the previously mentioned Preample was based on the partnership regulations that have no direct application to a sole-proprietorship. Thus, any extension of the "eralier of" time periods could be treated as a fiduciary violation of the 2510.3-102 plan asset regulations

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I think a sole prop WITH NO COMMON LAW EMPLOYEES would have a very strong argument that the ERISA plan asset regs do not apply becuase that individual is not a participant as defined in ERISA and the plan would not be an employee benefit plan under ERISA. In that case only the Code would apply and there would be a 30 day safe harbor.

However, once you get common law employees the issue becomes much murkier as to ERISA's application to whether the sole prop is a participant under ERISA.

There is a long discussion in this thread:


We may get guidance from the Supreme Court which just took a case regarding whether a sole shareholder (with common law employees) can actually be considered a participant under ERISA for purposes of anti-alienaiton.

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I agree entirely. You raise an interesting issue (which as you mentioned is pending in the Supreme Court). The issue:

Whether the working owner of a business (here, the sole shareholder of a corporate employer) is precluded from being a "participant" under ERISA Section 3(7), in an ERISA plan.

The facts. A few months prior to filing his bankruptcy petition, this guy sells his house and repays his 401(k) loan. The trusee in B'ruptcy want the reapayment returned as a "fraudulent conveyance." That will/may depend upon whether he is/can be a participant in an ERISA plan. If the fraud can't get corrected (and his plan assets are protected), then there is a possibility that the individual may not be entirely discharged of his debt. Either way, he will probably lose. But the issue is important.



In part, it states:

It is important for this Court to correct the error of the court of appeals because the question presented not only has divided the courts of appeals but also affects the rights and duties of ERISA actors in many contexts. Often, for example, the working owner of a small business who has purchased health or disability insurance for himself and his employees sues the insurance company for denying the owner's personal benefit claim. See, e.g., Wolk, Madonia, Vega, Fugarino, Agrawal, Robinson, Peterson, Gilbert, supra. The owner seeks state law remedies, the insurer invokes ERISA preemption, and the owner claims to be outside the ERISA plan. Courts, such as the Sixth Circuit, that have permitted the owner to split the plan in that manner have concluded that the owner retains his state law remedies, while his employees are limited to what are generally narrower remedies under ERISA. See, e.g., Fugarino, 969 F.2d at 186. That anomalous result defeats two purposes of ERISA: to "ensure[] that the administrative practices of a benefit plan will be governed by only a single set of regulations," Fort Halifax Packing Co. v. Coyne, 482 U.S. 1, 11 (1987), and to "ensure[] similar treatment for all claims relating to employee benefit plans." Madonia, 11 F.3d at 450.

In other contexts, such as the one presented by this case, the owner seeks to be recognized as an ERISA participant to gain protections that the owner contends are provided by ERISA, here the protection against alienation of pension benefits. See, e.g., Kwatcher, supra (sole shareholder suing for benefits from multi-employer plan). In those contexts as well, the Sixth Circuit's rule leads to the anomalous situation in which participants in a single plan have different rights and remedies. Moreover, to the extent that the decisions holding that working owners are not ERISA plan participants also stand for the proposition that the plans themselves have two separate components, one covered by ERISA and the other not covered, the result is even more impracticable. Under the Internal Revenue Code, a pension plan is either tax-qualified or it is not; it is not meaningful to describe a plan as tax-qualified in part. The same is true under Title I of ERISA. Title I requirements, such as the duty to hold plan assets in trust and to manage those assets in accordance with ERISA fiduciary duties, apply to all the assets of the plan. Indeed, in traditional defined benefit plans, in which plan assets are not held in individual accounts, it is impossible to apply ERISA fiduciary duties to only that portion of plan assets earmarked for employees other than working owners.

As noted above, a number of courts have tried to avoid treating working owners and their employees differently under ERISA by allowing the owners to be classified as ERISA "beneficiar[ies]" under 29 U.S.C. 1002(8). See pp. 7-8, supra (citing Robinson, Gilbert, Wolk, Peterson, and Harper). Those courts reason that ERISA's definition of beneficiary is broad enough on its face to include any "person designated * * * by the terms of an employee benefit plan[] who is or may become entitled to a benefit" under the plan. 29 U.S.C. 1002(8); see, e.g., Harper, 898 F.2d at 1434.

That approach, however, has two fundamental flaws. First, it has no logical stopping point: anyone could be "designated * * * by the terms of an employee benefit plan" as a beneficiary, even when that person lacks any employment nexus with the plan sponsor. For instance, in Hollis v. Provident Life & Accident Insurance Co., 259 F.3d 410, 415 (5th Cir. 2001), cert. denied, 535 U.S. 986 (2002), the court held that an independent contractor could be designated as a "beneficiary" under an ERISA plan, a result that is in considerable tension with this Court's decision in Darden that an independent contractor cannot be a plan "participant." Second, the "beneficiary" theory would enable working owners to assert rights only under welfare plans, and not under pension plans, because the ERISA provisions that govern pension rights use the terms "employee" and "participant," but not the term "beneficiary." See 29 U.S.C. 1052, 1053, 1054. Although a participant in a pension plan may have a beneficiary, such as a surviving spouse, pension credits can only be earned on work performed by an employee; the entitlement of the beneficiary is purely derivative. See 29 U.S.C. 1055; Boggs v. Boggs, 520 U.S. 833, 846-847 (1997). Thus, the only way to avoid the anomalous results produced by the court of appeals' rule is to reject it.7

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  • 2 weeks later...
Guest amfam2

I've read through this thread and there seems to be one question still unanswered:

From a tax standpoint, isn't it true that a sole proprietor would not be sure of the amount of their Earned Income upon which an employee deferral is based until the tax filing due date (April 15th)?

If the sole proprietor must deposit the "salary reduction contribution" by January 31st and they elect to contribute say, 3% of their earnings, how would they know how much to contribute if the amount of their Earned Income is not known until the tax filing due date?

In the administration of our plans, I forsee a situation where a sole proprietor contributes the maximum ($9,000) and then calls us later to inform us that his EI on the 1040 does not support a contribution of this size.

I am interested in your thoughts....

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That is the best situation to be in. EI is considered as earned on the the last day of the year (whether or not the amount is then known). April 15 is just the date that returns are to be filed (hopefully one does not wait until 4/15 to determine their P&L).

The only issue is when must the amount be contributed so as not to violate the DOL's plan asset regulations. In the case of a sole-proprietor (and partners too), the amounts must be elected to be deferred before the end of the year. It would appear to be better to make a contribution that is later found to be an excess (and corrected) than to remit a contribution after the "earlier of" rules. Logically, the rules should be the same, but are they? That is the issue. The basis upon which "partners" may possibly have longer period (i.e. the partnership regulations) can not be said to apply to a sole-proprietor, because a sole-proprietor is not subject to the partnership rules. Neither the Preamble, regulations, or private letter rulings have ever addressed this issue. No other guidance has been issued.

As mentioned by KJohnson, the plan asset regulations (under ERISA) may not apply to a sole-proprietor with no common-law employees. In which case, the tax-filing date would be the deadline for deduction purposes.

If ERISA applies, the statute appears clear that for a sole-proprietor elective contributions must be forwarded by 1/30, and possibly sooner.

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  • 3 months later...

Assuming the plan was not an ERISA plan, arguably Code Section 4975©(1) regarding prohibited transactions would apply if the contributions were not made within the 30 day period following the month in which the amounts would have been paid in cash--no exceptions. [iRC 408(p)(5)(A)(i)] Amounts contributed after that date would not be treated as SIMPLE IRA contributions AND arguably not deductible. [iRC 408(p)(2)(A)]

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