401(k) Written Plan Document

[Guest SCUDDESLER]

A client desired to install a 401(k) plan effective January 1, 2003 (the plan year will be the calendar year). This is a new plan and the client's only plan. The client consulted with "Attorney A" in November 2002. Consistent with the client's wishes, Attorney A prepared a deferral election form which the client passed out to all of its employees in late November 2002 (the plan provided for immediate eligibility). A trust account was established and participant's began making elective deferral contributions shortly after January 1, 2003. Attorney A told the client that the plan document does not need to be completed or signed until December 31, 2003. Since then the plan document has been completed and was signed by the client on September 3, 2003. Another attorney, "Attorney B", just reviewed the client's 401(k) plan. Attorney B asserts that a 401(k) feature cannot be retroactively installed and that all of the deferrals made by participants between January 1, 2003, and September 3, 2003, are impermissible deferrals. Attorney A, on the other hand, asserts that there is no problem with any of the 2003 deferrals since the 401(k) plan was signed no later than December 31, 2003, and is retroactive to January 1, 2003. Can anyone help me figure out whether Attorney A or Attorney B is correct? Thanks.

[KJohnson]

Attorney B is correct. 1.401(k)-1(a)(3)(B)(ii) deferrals must be after the later of the date that the employer adopts the 401(k) plan or the date the plan becomes effective. Here even if you have a 1/1/2003 effective date the employer did not adopt the plan until 9/3/2003.

[mbozek]

Ther are several issues regarding the date the plan was adopted. There is authority for plan adoption when a valid trust is established by year end even if the plan is not signed until a later date since the plan can be expressed in more than one written document. See Rev. Rul 81-114. The reg refers to adoption of the 401(k) "arrangement" which is a broader concept then the term plan. Second if the plan was established by board resolution, the board resolution could constitute authority for adoption of the plan and the signing of the plan would be a ministerial event. Obviously the IRS want 401(k) plans to be adopted before any deferrals by salary reduction.

[Guest Bud]

I agree with Attorney B and KJohnson.

- Attorney C

[Guest jashendo]

Attorney D, here.

Ditto.

The "plan must be adopted by year-end" rule (e.g., 81-114) is a deduction rule; here the question is not whether the employer is entitled to claim a deduction under section 404 for 2003 contributions. The question is whether the "elective deferrals" made by employees in, say, January, are excludable from their income (and excludable from wages subject to withholding, etc.). That's a whole different question. The deferral elections are being made with respect to amounts that would, but for the elections, have been "currently available" to the employees prior to the employer's adoption of the CODA (which, although different from "the plan", must be a part of "the plan").