What's the solution when it's discovered that the amount deducted for 2002 exceeded the HCE's deferral amount?

[katieinny]

The HCE thought he had contributed $11,000, the maximum deferral amount for 2002 and that's what he deducted on his tax return. It was recently discovered that his actual contribution was a few hundred less than the max. The CPA is suggesting that the HCE put the additional amount in the plan now rather than amending the return to correct the deduction amount.

I know there's a DOL issue with late deposits for the NHCEs, but what about for HCEs?

[david rigby]

The CPA is suggesting that the HCE put the additional amount in the plan now rather than amending the return to correct the deduction amount.

Hmmm. I'm not an accountant, but I would be nervous about a CPA who suggests an incorrect tax filing can be fixed in this way.

[katieinny]

If the remaining 2002 deferral is contributed now, I would think that a penalty would still apply that would require the filing of form 5330. Do you agree?

[Harwood]

Deferrals have to come out of paychecks [except for the self-employed].

It is absolutely impossible to make a deferral for 2002 in January 2003, much less November 2003.

[Brian Gallagher]

It's time to amend that tax return!

[E as in ERISA]

Is the HCE a W-2 employee or a sole proprietor, a partner, etc.? If it's the former, I don't understand how the CPA got the wrong number for the tax return (the W-2 would have been netted). If he is self-employed, a partner, etc., then the rules may be different (he may actually be able to make the contribution after year end). But in any case, I think that it's probably too late now.

[katieinny]

The HCE is a partner. The office person at the time was less than meticulous about keeping track of deposits to the plan, and the TPA relied on the office person. It was the HCEs intention to maximize his deferrals, so he told his CPA that he did. We were investigating a series of missing contributions for the NHCEs when this turned up.

[E as in ERISA]

From an ERISA standpoint, this is what the preamble to the regulations on timing of contributions says:

c. Partnerships. Two comments were received relating to when contributions by partners to section 401(k) plans become plan assets. The letters represent that, under 26 CFR 1.401(k)-1(a)(6)(ii), a partner's compensation is deemed currently available on the last day of the taxable year, and an individual partner must make an election by the last day of the year. They ask when the monies, which otherwise would be paid to a partner, but for the partner's election, become plan assets, inasmuch as partners do not receive wages. In the view of the Department, the monies which are to go to a section 401(k) plan by virtue of a partner's election become plan assets at the earliest date they can reasonably be segregated from the partnership's general assets after those monies would otherwise have been distributed to the partner, but no later than 15 business days after the month in which those monies would, but for the election, have been distributed to the partner.

[Guest Robin S. Vatalaro]

Responding to katieinny:

The DOL has stated informally at conferences that they will hold HCE's to the same standard as NHCE's when it comes to deferral deposit timing. The commentary involved an attendee's question to Virginia Smith regarding a two person 401k plan. Company owner and one non-related ee. Company owner was making his own deferral deposits late. DOL said that would be subject to the usual sanctions even though the owner was only hurting himself.