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SIMPLE IRAs


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Can an employee make a salary deferral contribution 1n 1998 for the tax year 1997 up to due date of his employer's tax return, including extensions? If so, how would the employee report and deduct the contribution on his 1997 1040? Code sections 404 & 408 and commentary indicate that a contribution after the close of the tax year is allowed but I can find no guidance on how to report it. It can't be reported on 1997 W-2 because contribution was made in 1998. HELP! NEED AN ANSWER BEFORE OCTOBER 15 1040 DEADLINE!

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The requirement under Section 408(p)(2) that an employee may elect to have the employer (i)contribute amounts to the IRA or (ii) pay the employee in cash seems to preclude a post 1997 employee deferral to the IRA because the employer has already paid the employee for 1997 in cash. See also 408(p) (5)(i), which says that elective contributions must be made within 30 days of the end of the month that the pay would otherwise be paid to the employee. The ability to contribute after the end of the year applies only to employer matching contributions and employer nonelective contributions. 408(p)(5)(ii). These arrangments don't work through employee tax deductions. They are similar to 401(k) plans in that the contributions never get into employee pay and therefore are not taxed as income.

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Although I agree with QDROphile, it should be noted that a PARTNER's salary deferral amount (depending upon the circumstance) may be contributed long after the year is over; for example, the accountant hasn't determined the earned income (if any) of the partners. In such case, the regulations _appear_ to permit a contribution at a later date than would apply to an employee whose wages are reported on a Form W-2. [in the case of a partnership, a cash draw could be characterized as a return of capitalby the time the CPA does his or her analysis.] From the preamble to the plan assset regs:

<--------------CUT HERE------------->

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 [ed: read 30 days for SIMPLE] after the month in which those monies would, but for the election, have been distributed to the partner.

[Note: This message was edited by Gary Steven Lesser]

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Thanks to QDROphile & Gary for quick response to my question.

Gary's response indicates that there is a window for an employee to make a salary deferral contribution after the year is over. Would this apply to an employee-stockholder of an S Corporation? If so, how would that employee report and deduct the contribution on his 1997 Form 1040?

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Absolutely not. Only a partner in a partnership (and arguably a sole-proprietor as well). This "window of opportunity" would never apply to a common-law employee (including a shereholder employee of a Sub S) paid on a W-2. Consider too, that (in respect to partners and self-employed individuals) it is _my_ interpretation of the preample.

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  • 2 weeks later...

The IRS has not issued any guidance on what would happen if the employer failed to make the contribution it agreed to make in the Notice to employees. IMO, the termination will not be effective until the following year. Rights under applicable state laws may have also been created. OTOH, an amendment not inconsistant with the notice to employees might arguably be permitted (e.g., a change in documents from one vendor to another).

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