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Can a sole proprietor (no employees) make his employee elective contri


Guest Kathleen Fouquet

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Guest Kathleen Fouquet

Can a sole proprietor (no employees) make his employee elective contribution for 2000 as a $6,000 lump sum now (by the 2000 tax filing date), or was he required to make regular contributions throughout 2000?

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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. Thus, the elective amount, in the case of a self-employed individual, may be contributed after the end of the year.

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 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 situation.

Example. The Able-7 Partnership maintains a SARSEP (same result if SIMPLE-IRA). On December 31, 2000, 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, 2001, the extended due date of Able-7's 1999 return.

Hope this helps.

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