Sole Prop 401(k) - when does 401(k) ctrb need to be made?

[Guest Emiman]

We have a potential owner-only 401(k) plan who estimates his compensation for 2002 will be approx. $100,000, but will not know for sure until early next year when his taxes are completed.

A CODA states the contribution is deemed available on the last day of the sole prop's taxable year. My question is does he have to deposit $11,000 by 12/31/02 or can he deposit $11,000 as an elective contribution early next 2003 when he knows what his compensation will be for sure? He would prefer to wait until next year (before the tax return is filed).

If he earned enough compensation (over $160,000) I would advise that the whole contribution be considered an employer contribution, but he knows for sure it will not be that much. If anything, he is assuming a high figure this year.

Thank you in advance for your assistance.

[Mary Kay Foss]

My understanding is that the deferral (the $11,000) has to be made before 12/31/02. The deferral is supposed to be determined before the income is earned so you're violating the spirit of 401k if you wait until after year end.

Clients switching from a SEP or a PS Keogh are having difficulty with the 401k concept because they are making contributions in two calendar years instead of one.

[mbozek]

dispite what the regs requirem many partnersips and their accountants delay making 401(k) contributions for owners until the partner's draws have been established under the profit sharing formula of the firm. Some times the conribtions are delayed until well into the following year. The deferral is justified on the grounds that until the draws are known the partners dont know how much to contribute.