Prior year 403b Contribution

[Guest hickeybob]

An employee who was terminated for cause won reinstatement along with back pay for all of last year. The question: Can he contribute to 403b and have it count to last year when we pay him his back pay this year? And if he can, how do you report it on his W-2?

[Guest Steph]

Will you be issuing him a W2 for 2001 or will it all be on his 2002 W2?

[Guest hickeybob]

This will be a 2002 W-2

[Guest Steph]

I am not saying that I have the definitive answer, but given that he has no w2 income for 2001, I do not see how he can make a salary deferral. Did the judge order that he be allowed to make a contribution?

I would consider asking the custodian of the 403b, but I don't see how he can defer income he didn't receive. Will the amount he contrbutes put him over the maximum contribution if he contributes it off of this year's w2?

Hope this helps -- Stephanie

[mbozek]

If the employee was not an HCE (earned less than 85k) the employer can make the contribution for 2001 and reduce the employees back pay award since an employer contribution can be made as late as the date for filing the 990 form. Er contributiuons are not reported on any tax form. If the employee is an HCE, treat the contribution as a salary reduction contribution for 2001 (employers can contribute the salary reduction contribution as infrequently as once a year to the annuity provider). But the employer will have to issue a W-2 for 2001 which the accountants may not approve since the employee is a cash basis taxpayer (see below).

The real issue is whether under the terms of his reinstatement the ee is permitted to make a contribution for a prior year. If not then the argument is that his wages are earned in the year he receives the payment and since he is a cash basis taxpayer the money can only be contributed for the year he receives it. If the reinstatement provides otherwise then the er can argue that contributions cannot be made for a prior year because ee is a cash basis taxpayer. Also remember that for 2002 contributions to a 403(B) can total $40,000 and if ee is not hce it will not be a problem for er to structure contributions for both 01 and 02 up to the 2002 limit.