Participation starts when?

[Guest cpamichael]

Calendar year 401(k) Plan. ER payroll periods are 1-15 (paid the 25th) and 16-EOM (paid the following 10th). One year service required for entry and quarterly entry dates January, April, July and October 1. EE starts January 1, 2000, meets one year service requirement December 31, 2000 and enters plan January 1, 2001. EE first deferral (and related ER match) should begin with the payroll December 16-31, 2000 paid January 10, 2001 OR the payroll January 1-15, 2001 paid January 25, 2001?

[Blinky the 3-eyed Fish]

The payroll beginning 1/1/01 should be used. The December 2000 pay is for work prior to their entry into the plan, so deferrals cannot be taken from that.

[rcline46]

There have been interesting discussions regarding this point. IMNSHO, any pay received on or after the entry date is eligible for deferral.

Why? The Cash or Deferred election must be made before income is received (constructive receipt). Nothing in the law or regs say it must be made before the income is earned. The employee does not have constructive receipt until they receive their check.

[RCK]

I agree with rcline46. Not only has every plan that I've been involved with handle it that way, but it makes sense. Individuals are cash basis taxpayers, and on a cash basis the January 10 check should have the deferral taken. It is 2001 income.

I think that the issue gets a little fuzzier if the payroll runs on December 24 and the employee gets the check on January 3. In that case, the determining factor for me is the check date. A check date in 2001 means 2001 income, and means subject to deferrals.

RCK

[Blinky the 3-eyed Fish]

Cpamichael, how is payroll reported on the W-2 in this case? Is the last half of December reported on the 2000 or 2001 W-2 ?

[Guest cpamichael]

The payroll accrued December 16-31, 2000 and paid January 10, 2001 is reported on the 2001 W-2, as is the payroll accrued January 1-15 and paid January 25, 2001. The last payroll on the 2000 W-2 is the payroll accrued December 1-15 and paid December 25 (really the 24th, as the 25th is a holiday).

The ER's real concern is the treatment of prior EE-participants using the "accrual" basis. Treating the new EE differently, on a cash basis, to the ER is discriminatory (read "anal") against the old EEs. The problem is compounded because the ER offers a match.

[Earl]

I think you can do it either way, however... who out there takes Actual W-2 wages, backs out first payroll and adds on first payroll of following year..... no one that I know, although I think you can do it.

Obvious easy way is to follow the timing of constructive receipt, which requires enrolling January entrants at the beginning of December.

Related to that is the agrument I have heard about when to terminate counting compensation and to stop deferrals. There is some arguement about when the employer/empoyee relationship is severed and being able to not count wages paid after that date. Again no one i know really does that except in the case of doctors that continue to receive accounts receivable payments that flow into the next year. Or commissions that take 6 months to receive and payout....