401(k) deferrals for pay period ending vs actual pay date

[Guest susa]

Deferrals were for pay period ending 12/29/01 paid on 1/3/02. Are they included in the 401(k) plan for 2001 or 2002?

[Guest MEGary]

I guess the way I look at it is what year will that money be reported on the participant's W-2? That should answer your question.

[Guest yukon]

I thought if you're using cash-basis accounting, then 2002. If it's accrual-basis, then 2001. (right?)

[mbozek]

Employees are presumed to be cash basis taxpayers so payments will be deemed taxable as 2002 wages unless the funds were available by EFT or checks were dated by 12/31/01. There is a rule that compensation is deemed paid to an employee in the year that the employer deducts it . Need to check with the accountants to see whether pay was deducted for 2001 by employer. If pay is includible in 2001 then it should be reported on employees W-2.

[Guest yukon]

mbozek: I think that is understood. I believe the question was, is it "included in the 401(k) plan...?".

[mbozek]

yukon: the contributions are deemed made when the compensaton is deemed paid to the employee because the contributions are made from the employees's wages. If the comp is paid on the employers records on 12/29/01 the deferrals should be deemed made for 2001 because they were withheld from the participant's wages on that date and the wages would be deducted by the employer for 2001. The question is when the wages for the period ending 12/29/01 were paid by the employer for deduction purposes. If the amounts will be deducted as an expense on 1/3/02 then the contributions are deemed made in 2002.

[Guest yukon]

Susa.

Here's what I think:

If you're in a cash-basis environment, you would show such a contribution on 2002 participant statements, but include it as a 2001 accrued contribution for accounting and tesing purposes.

If you're in a traditional, balance-forward environment, you include it in 2001 participant statements, and also in 2001 accounting and testing.

Yuk.

[mbozek]

In order to be included for ADP purposes, Reg 1.401(k)-1(B)(4) requires that a deferral be allocated to a participant's account under the plan as of a date within the plan year.l

[Tom Poje]

example from ERISA Outline Book

Elton quits 12/28/99, receives last paycheck on 1/7/2000.

It is reasonable to not treat Elton as eligible for plan year 2000.

But what if he defers out of final paycheck?

Plan administrator must take reasonable approach. one approach is to treat deferral as made on account of plan plan year in which the termination occurs (Hence 1999)

As long as you are treating all people the same, you should be ok.

This is one of those fascinating things (ok, I find it fascinating).

Plan year may be calendar, but 'compensation' used might actually run from a working period something like 12/30 - 12/28.

In your example, would you handle your situation different if it was an HCE who deferred 0 for the year? That would help the test big time, wouldn't it!

[Mike Preston]

If this gets posted twice, I apologize in advance.

It depends on what the definition of compensation is in the plan. If W-2, it is recognized in the year when paid.

If 415 comp, you can treat the compensation as on behalf of the prior year, as long as you do so consistently for all. See 1.415-2(d)(5)(ii).

The advantage of using W-2 is easy to spot. The disadvantage is that the terminee who is paid their last check in 2002 needs to be "handled" in some way that makes sense. I tend to include them in the subsequent year, but I see the point about not including them because their employment relationship has ended as viable. Although I am concerned that allowing the deferrals might be inconsistent. OTOOH, I don't see how I can tell the participant that the deferrals won't be allowed from their final check.

The 415 comp method gets rid of the administrative complexity associated with the terminee, but adds complexity for all the other participants in the plan as to what year the first payroll of every year applies to.

Most plans use W-2, in my experience.