effective date

[wsp]

I know you can't have deferrals prior to the signing of a plan document. Does that apply to individual 401(k)'s whose plan sponser is an s-corp? I don't believe so but are there any section citings that I can provide to the client telling him that he can't as his financial advisor is adamant that he can.

[Earl]

1.401(k)-1(a)

...A cash or deferred arrangement is part of a plan for purposes of this section if any contributions to the plan, or accruals or other benefits under the plan, are made or provided pursuant to the cash or deferred arrangement.

Sounds like deferrals can be made pursuant to a deferral arrangement. No arrangement, no deferrals.

[Mike Preston]

wsp, can you clarify what you are saying. There seems to be a "not" missing somewhere. I agree with Earl, though.

[wsp]

Essentially, the financial advisor is telling the client that he can set up the individual 401(k) for him effective 12/31/02. He is going to reclassify 11k of his pay into earned income, pay the self-employment tax, and then defer that into the newly setup 401(k). The reclassification of pay, I don't have the issue with..it's the creation of the individual 401(k) effective 12/31/02 that I wasn't sure about because we are dealing with an S-Corp and an individual. If the reclassification occurs after the signing of the documents isn't that persuant to the arrangement? Or must the documents physically be signed prior to 12/31/02 itself?

[Mike Preston]

Unless the 401k was established before 12/31/2002, the arrangement the financial advisor wants to establish is not legitimate. Further, even if the arrangement was established before 12/31/2002, unless the individual executed a salary deferral election form on or before 12/31/2002, the deferral of income into the plan is not legitimate. I have serious doubts as to whether the reclassification of income is legitimate, at this date, either. Run from this as fast as you can, keeping in mind that you now know about the intent of the financial advisor. This puts you in a tough spot. I think the right advice for you is to consult your own attorney to see what YOUR responsibilities are in this area.

[Belgarath]

Mike is right. Run!!

Just as a side note - I'm only going from memory here, and don't have a citation, but I believe that in pre-92? years, an UNINCORPORATED PARTNER could actually make the deferral election up to the due date, including extensions, of the partnership return. I don't remember what piece of legislation or regulation changed this, but I absolutely agreew ith Mike that you can't do it now. Wait - I do have a citation - 1.401(k)-1(a)(6)(ii)(B). Perhaps this old rule is being remembered (and incorrectly, since it didn't apply to S-corps) by the advisor.