Plan Assets - Sole Proprietors

[Guest jeffline]

Does anyone know the IRS and DOL positions on segregating and depositing elective deferrals for the sole proprietors own earned income? Has there been any recent changes or guidance?

Is it based on when earned income is finally determined?

[jquazza]

Sole Prop have until their tax filing deadline to deposit their deferrals (including extensions,) however, they must have made a written election to defer before the end of the plan year.

[Lori Friedman]

jquazza, I'm confused by your statement about a written election before year-end. I know of no such requirement. The taxpayer makes an irrevocable election to pay a contribution when he/she files Form 1040 and claims a deduction for the amount. See I.R.C. Sec. 404(a)(6). If you're aware of something that I've missed, I'd be grateful to learn more about it.

Reminder -- If a plan has a funding requirement (e.g. DBP, MPPP), ERISA requires payment within 8-1/2 months. For a sole proprietor, this ERISA deadline is 1 month earlier than the October 15th final extended due date for Form 1040. Of course, this rule doesn't affect a 401(k) plan, but it's worth mentioning just so that people won't forget and rely on the tax return extension for every type of plan.

[Belgarath]

I agree with jquazza. However, there are those who believe that this treatment is only for unincorporated partners, and does not extend to the sole props.

[Belgarath]

Lori - re the timing of signing the deferral election - 1.401(k)-1(a)(6)(ii)(B) deals with this issue for partners. Most TPA's that I know of interpreted this to apply to sole props as well, even though they weren't specifically mentioned. It seems unlikely that they would be treated differently. Apparently, the IRS would tend to agree, as in the PROPOSED regs (see prop. reg. 1.401(k)-1(a)(6)(iii) they specifically mention sole props as well.

[Lori Friedman]

Belgarath, thank you for the information. The proposed regulations would have a sole proprietor maintain a CODA under rules that follow the existing rules for partnership CODAs. I guess the IRS is looking for consistent treatment for all employees, partners, and sole proprietors -- elective deferrals should be made contemporaneously from earned income, not in arrears after year-end.

[mbozek]

Under a plr a partnership can contribute an elective deferral for a partner as late as the date for filing the pship tax return with extensions if the contribution is made from the partner's draw, i.e., the share of profits due the partner for the pship tax year if the partner has signed a election by the end of the tax year.