Due Date for Deferrals for Partner

[MarZDoates]

Client is a Partnership and sponsors a 401(k). The two Partners elected to defer $10,500 each for the 2001 plan year. They submitted their contributions to the Trust March 1, 2002.

I understand that a Partner's compensation is deemed currently available on the last day of the partnership's taxable year (12/31 in this case). However, their "earned income" could not be calculated by their CPA any sooner than March 1, 2002.

Question is: Does this violate the DOL requirement that employee deferrals be seggregated from employer's plan assets and placed in Trust as soon as possible, but in no event later than the 15th business day following time of deferral????

Any input is greatly appreciated!!

[mbozek]

This is a common problem in partnerships where expenses and allocations among the partners cannot be prompltly completed. Pship position is that until phsip income can be determined by accountants partners do not have earned income and cannot determine amt of 40lk contribution since they cannot determine what their ADP % is. It is a defensible position in practice and it is unlikley that the firms ar going to change their acounting practices to conform to DOL rules. I am npot wure how the dol would tereat such a violation since it is on behalf of the two self employed owners not a rank and file employee for whom ERISA was intended. A more important question is whether the contribuition can be made for the prior tax year when it is not made until 3/1. IRS re

[mbozek]

This is a common problem in partnerships where expenses and allocations among the partners cannot be promptly completed. Pship position is that until phsip income can be determined by accountants partners do not have earned income and cannot determine amt of 40lk contribution since they cannot determine what their ADP % is. It is a defensible position in practice and it is unlikley that the firms ar going to change their accounting practices to conform to DOL rules. I am not sure how the dol would treat such a violation since it is on behalf of the two self employed owners not a rank and file employee for whom ERISA was intended.

A more important question is whether the contribuition can be deducted for the prior tax year when it is not made until 3/1. IRS requires that 401(k) contributions be made by end of year but many phips delay contribution for owners until earned income for partners is determined.

[MarZDoates]

Should this be reported on Form 5500-Schedule I as untimely contribution?

[Archimage]

It sounds like they want to max out their contribution every year so just have them put their $11,000 in the plan before the end of plan year.

[mbozek]

A: That is not a practical answer because the ADP usually permits far less than $11,000 deferral and until the partners know what their draw is they cant make a computation. Also, in some firms it takes 6 months or more before the earned income for the firm is finally determined because of complex allocation formulas--- this is really an accounting question and I am not an accountant.

MarZ: Your Q is an accounting question but I dont know of any pship that would report a deferral on sked I because of the implication. If there is a delayed deferral there is a requirement to impute interest which would be objectionable since the pship would be paying the interest to its owners, i.e. itself.

[Archimage]

mb, that is true but the original post did not address this. I was under the assumption that this was not an issue. If ADP is an issue than yes, you would need to wait.

MarZ, accountants will make the compensation whatever it needs to be in order to reduce income tax. This is what we refer to as "cooking the books". If the ADP is an issue for you then it would be best to wait until comp figures have been computed.