Deadline for Salary Deferral Contributions

[Appleby]

Any thoughts on T.C. Summary Opinion 2006-58

http://www.ustaxcourt.gov/InOpHistoric/runyan.sum.WPD.pdf specifically that the deadline for the SIMPLE contribution is January 31. From everything else that I have read, the deadline for depositing the salary deferral contribution (for the unincorporated business owner) is the employer’s tax filing deadline-

[saabraa]

To me, the Tax Court decision looks solid. The court cited the statute, 408(p)(5)(A)(i), which specifically requires that elective deferrals be deposited within 30 days after the end of the period (12/31). It doesn't mention any exception for the self employed 1 man business. Notice 98-4, Q and A G-5 repeat the rule. The last I heard, IRS's Roger Kuehnle expressed his opinion that the rule definitely applies to the self employed. The last I heard, Mr. Kuehnle is the #1 IRA person at IRS.

If anything, it looks as if the IRS was a little generous to allow what looks to be the SEP contribution limit.

[Appleby]

Except that Notice 98-4 is citing the earliest date that can be reasonably segregated rule, which as you know applies to all salary deferral contributions. While it is clear that this deadline applies to common-law employees/W-2 Wage earners, it appears that exceptions apply to unincorporated business owners. From what I understand, the unincorporated business owner must make the salary deferral election by the last day of the tax year, but the amount can be deposited by the unincorporated business owner’s tax filing deadline. I am looking for supporting cites and will post such.

[Guest mjb]

PLR 200247052 permits a partnership to contribute the 401k salary deferral amount for self employed partners to the plan if the deferral amounts have been withheld from the periodic advances (draw) paid to partners during the plan year. In most partnerships the actual amount of the deferrals for HCES is not known as of the end of the firm's tax year since the firm does not know how much each partner's actual net earnings are until the firm's tax return is filed. Many p'ships delay contributing the partners' deferral under the ADP% to the plan from the net earnings from SE due the partner (after reduction for the draws paid during the year) until the firm's tax return is filed under the theory that the deferral cannot be contributed before the partner's net earnings from SE have been determined under the firm's accounting rules.

[Appleby]

Appreciate comments from you both.

Still have not had time to look for cites, but I did run a search and found this link http://benefitslink.com/boards/index.php?s...560entry85560 .... it does not appear definitive, but...

[ERISAnut]

PLR 200247052 permits a partnership to contribute the 401k salary deferral amount for self employed partners to the plan if the deferral amounts have been withheld from the periodic advances (draw) paid to partners during the plan year. In most partnerships the actual amount of the deferrals for HCES is not known as of the end of the firm's tax year since the firm does not know how much each partner's actual net earnings are until the firm's tax return is filed. Many p'ships delay contributing the partners' deferral under the ADP% to the plan from the net earnings from SE due the partner (after reduction for the draws paid during the year) until the firm's tax return is filed under the theory that the deferral cannot be contributed before the partner's net earnings from SE have been determined under the firm's accounting rules.

When you add this to the fact the the court's decision was only applicable to that particular case and should not serve as precedent in any other case, this is the one I continue to go with. The key for this to work, however, is for the actual "election" of the amount to be deferred must be made before the end of the taxable year. Sign a statement and have it notarized if you have to, but prove that your election was actually made (but the dollar amount not yet determined until the actual compensation figures have been calculated). In the absence of this proof, the IRS auditor gets pissed because he is thinking your decision to defer was actually made after the end of the year; and you lose your case in court by an interpretation of 30 day administrative requirement (that also references the ASAP provision of the DOL). A simple document detailing that an irrevocable decision to defer a definitely determinable amount once your compensation has been calculated would have likely gotten a different decision.

[Bird]

Here is my take on this, please let me know if I'm missing anything-

The court case involves a SIMPLE IRA. As noted, the Code specifically says that SIMPLE IRA contributions must be deposited not later than 30 days after the close of the month in which they were withheld, and since a partner's earnings are determined as of 12/31, that means they must be withheld by 12/31 and deposited by Jan 30. Since it's in the Code, failure to deposit by that date means it's not deductible, and in fact the court concluded exactly that. In no way does Notice 98-4 say anything that would allow a longer time period; it notes that SIMPLE IRA deferrals are generally subject to Title I and therefore subject to the "reasonably segregated" standard, but adds: "in no event later than the 30-day deadline..." I don't believe that there's any room for an exception just because you don't know the partner's income. I concluded a long time ago, for SIMPLE IRAs and well as 401(k)s (but it's not as important; see below), that you simply don't allow a partner or sole proprietor to elect a percentage of pay; you force them to elect a dollar amount. In the (unlikely) case that they don't have enough income to justify the contribution, you'd have to do a refund. I don't buy into any argument that says you get extra time just because you can't determine income. The Code says 30 days, period; tough nuts.

References have been made to the "as soon as reasonably able to segregate / 15 day" standard. But that comes from DOL regs and does not affect deductibility, just DOL "issues" ("harassment" might be appropriate but that's off-topic). So, I believe that you could make a self-employed 401(k) deferral contribution (but not a SIMPLE IRA deferral contribution) as late as the due date of the tax return and deduct it, and I think the IRS agrees. However, then you have a DOL issue with "late" contributions. Presumably, you should fix it by adding interest. Again, I tell my clients that they have to elect a $ amount, not a percentage, so there's no excuse to not put the money in.

In short, there are two different issues - 1) deductibility, 2) timely depositing under DOL regs.

[saabraa]

Bird, my bottom line agrees with yours. There's no overcoming a conclusion that SIMPLE Ira elective contributions must be deposited before January 31. (You don't even get the 31st, contrary to the court's typo; I believe the 30th was on a Friday in 2002).

The code is clear, at section 408(p)(5)(a)(i). Notice 98-4 repeats the deadline; then it SEPARATELY mentions the DOL rule concerning the time when the money can be reasonably segregated from the employer's other assets. ERISA doesn't apply to the 1 person owner only plan in question, though that's ultimately irrelevant here.

The plan has failed to 'qualify' as a valid SIMPLE, since it doesn't meet 408(p)(1)(A), which says a SIMPLE plan (Coen bros?) is one that meets 408(p) 3,4, and 5. I agree with the previous thread regarding the due date of the tax return, but that deals with 401k deferrals.

The PLR dealt with a 401k plan, not a SIMPLE Ira. The court case facts indicate the employer deposited the contribution into a SEP Ira account. (SEP has a lower contribution limit, in this case) The employer did not present any plan document, but that's irrelevant too.

[ERISAnut]

Your arguments are fine. The reality is that many people are doing it differently, and auditors never challenge it. When looking at the circumstances of the case, it was hard to establish what type of plan was involved and under what authority contributions were made. So, in response, the court went with the easiest interpretation to understand. Again, this is fine.

But, there are hundreds of audits where the taxpayers have all their 'ducks in a row' and this never gets challenged.

[Gary Lesser]

As for the Trial Judge and T.C. Summary Opinion 2006-58, the Judge was playing games. There were no documents; the Judge interchanged the terms SEP and SIMPLE. There is no indication that any of the DOL rules were ever addressed by the parties. The case cannot be cited as precedent. It might have been a ploy to get some of the income tax penalties reduced, abated, or eliminated. In any event the SIMPLE-IRA must be the exclusive plan; it wasn't, it never existed. Since the IRS is accepting PLR and EPCRS requests instead of issuing guidance we may never know the answer to this (especially as it affects a self-employed individual or partner in a partnership).

It would be unwise to rely too heavily on the 401(k) regulations regarding an extension of the 30-day-or-earlier deposit requirement under 408(p); the only plan section that contains a deposit-timing rule. DOL rules aside (and they do generally apply), the code is more restrictive. The 401(k) regulations do not apply to SIMPLE IRAs. Consider however --

* Notice 98-4 states "... otherwise would have been payable to the employee in cash" approach." [Q&Q G-5]

* FAQs on SIMPLE on IRS site (Reirement Community tab) confirm "January 30th"

* Publication 590 also supports the "... otherwise would have been payable to the employee in cash" approach." [see page 10.]

* Publication 590 also appears to support deductions "in the tax year with or within which the calendar year for which the contributions were made ends," although there is a time limit for elective deferrals. [Also on page 10]

This leaves open the possibility of disqualification (or an EPCRS correction). There are no deduction carryforward provisions (as there are for SEPs).

Clearly some definitive guidance is needed. Hope this adds to the body of knowledge.