how far past 12/31 can a sole prop make 401(k) contributions?

[Guest dubya]

401(k) contributions have to be made from compensation currently available. They can also be made from year end bonuses, paid up to 2-1/2 months after PYE. Other than this "exception", a sole prop could not make 401(k) contributions to his 12/31/2003 plan (which covers his other 2 ee's) in 2004.

Can anyone confirm some or all of the above and if possible, provide a section/reg site that I can reference? A new client was told that as a sole prop, he had up until 4/15 to make his own 401(k) contributions to his plan, and have it count towards the previous year. I do not think he is right, and may need to show him the code section/reg to convince him.

Thanks

[Blinky the 3-eyed Fish]

A sole proprietor or partner in a partnership has until their tax return due date to contribute his or her deferrals into the plan. What needs to be in place by the end of the plan year is an election by the individual stating what amount is to be deferred. The logic is that these individuals' compensation is undeterminable until the tax return is done, so the deferrals cannot be made without blindly knowing whether they will pass the ADP test or exceed compensation, etc.

So, in this case, if your client's election was in place timely, then your client is right. Of course the reality of it is that the election is always in place in these situations.

[Guest dubya]

Blinky - Thanks for correcting me on that, as I thought that they did not have until the tax return date to make the contribution. Is what I stated true for other entities (eg Corps)?

As for the election that has to be in place by the end of the year, is this just a standard "401(k) deferral Election" form that all participants are expected to complete, indicated how much they want to contribute?

[Blinky the 3-eyed Fish]

No, it's not the same for corporations. Read back to the reasoning I mentioned in my first post. A corporation pays a salary, so the compensation is known.

In answer to your second question, yes.

[WDIK]

I think that dubya is referring to language found in some nonstandardized prototype documents that allows a participant (usually at the administrator's discretion) to elect to defer from a bonus payable for a plan year which is paid after the end of the plan year but not more than 2-1/2 months after the end of the plan year.

(Edit to correct poor typing)

[Blinky the 3-eyed Fish]

That's not the same though.

[WDIK]

401(k) contributions have to be made from compensation currently available. They can also be made from year end bonuses, paid up to 2-1/2 months after PYE.

Is what I stated true for other entities (eg Corps)?

Blinky, I don't think I'm disagreeing with anything you said regarding the timing of deferral elections and compensation. As you state, the scenarios for a corporation and a sole-proprietor are not the same. My response was an attempt to answer dubya's question as quoted above. (At least what I thought was dubya's question.)

[Guest dubya]

WDIK, I did have in mind the 2-1/2 month bonus pay that some documents allow for, but I was seeing that only as an exception to what I thought was an across the board rule of no 401(k) contributions after 12/31 for the prior year. Blinky says that applies to corps but not to sole props or p'ships.

[mbozek]

Since a pship sponsoring the plan is a separate taxpayer from the partners, the partners draws for a year may not be determined for several months after the tax year ends, e.g., when the pship tax return is filed. However, the 401(k) deferrals are considered to be contributed to the partnership by the end of the year since the pship is holding the funds for the partners until the draws are determined. When the draws are computed the salary reduction contribution is determined under the ADP test and contributed to the plan. There is an IRS ruling approving this method.

I dont know whether a sole prop can take advantage of this delay in making deferrals to a 401(k) plan after the end of the tax year since the sole prop is the same taxpayer who sponsor the plan.