Safe Harbor 401(k), with Sole Prop and short initial plan year.

[Belgarath]

You have a safe harbor 401(k) plan effective 10-1-03, so first year is a short plan year. Employees, obviously, are only allowed to defer on income on or after 10-1-03. But what about the sole prop owner? Can he defer based upon entire year schedule C income? Since this income is earned technically on 12-31-03, a literal reading would seem to indicate that he could. But this also produces a result which appears discriminatory, in that rank & file get to defer based upon 1/4 of their income, and the sole prop gets to use 100%. Any thoughts?

[Archimage]

Why not think of it another way. I am assuming your client earned at least $20,000 in the last quarter. Why not just say he decided to defer $12,000 to $14,000 of that $20,000?

[Belgarath]

Yes, thank you - I had already considered that approach. But based on the client's preliminary estimate, the income will be more like 40,000 for 2003. First year of the business - in 2004 he's already estimating in excess of 300,000. Which is why he wants to defer the max for 2003.

[Archimage]

I guess it would fully depend on what the document said. I can't think of any regulation that would make you pro-rate his earned income over the year.

[jquazza]

I agree with Archimage, and I would add, since this is the first plan year, you shouldn't even have a short limitation year, so you don't have to prorate the annual compensation limit.