Partnership rules for 402(g) - non-calendar Partner Year?

[Guest Chaffee]

Partnership has a 9/30 Taxable Year. Certain partners make 401(k) deferrals through the entire year out of bi-weekly draws, and then make a "final" contribution to reach the maximum.

Per review of 401(k)-1(a)(6), it appears that Partner Compensation is available on last day of plan year (e.g. 9/30/03).

Suppose amounts are withheld in October 2002 of $2,000 out of a partner's draws and remitted to the trust. For 402(g) purposes, do these count for the calendar 2002 402(g) limit purposes, or are these deemed to be 2003 contributions (since the "Compensation" is not earned until 9/30/03).

Would the answer change if the individual partners filed their own returns on a 9/30 year or 12/31 year?

[K-t-F]

402g is a calendar year limit. What is reported on the W2 for the calendar year must not exceed the 402g limit.

Regarding the plan's accounting, if you made a deferral during October '03 based on compensation that was earned during October '03 then the deferral would be accounted for in the plan's September '04 admin.

The deferral made in October '03 (along with any deferral made during the first nine months of '03 and accounted for in the 9/03 plan year admin) would count towards the 2003 402g limit.

[E as in ERISA]

My understanding is the opposite.

I understood that the compensation and deferrals are both considered as occurring on 9/30/03 for purposes of 402(g).

See Notice 87-13, Q&A 6:

"How does section 402(g) apply to partners of a fiscal year partnership for the first taxable year of the partnership ending after December 31, 1986?

… such elective deferrals would be treated as having occured, for purposes of section 402(g), on the last day of the partnership year..."

So the October 2002 contributions would be reported on the K-1 for 9/30/03 and treated as occurring in 2003.

[K-t-F]

Not disputing... it simply seams curious to me that if the actual deferal was made during the 2002 year it should be counted for that year. I am not wrong in my statement that 402G is a calendar year limit... right? I guess the twist is the fact that it is a partnership and income is declaired on a K-1

I apologize for the misinformation

[Guest Chaffee]

Thank you very much for the response. Can you point me to a good resource for a copy of IRS Notice 87-13? All the Internet Sources I have looked in don't seem to go that far back.

To PATA's question, it is my understanding that the 402(g) limit is based on the taxable year of the individual (which is usually a calendar year). Thus, if a partner in this firm filed his personal return on a calendar year, a calendar year limit would apply. Is that correct?

Having said that, the IRS Notice seems to indicate that even though the trust was funded in October 2002, they are not considered contributions (or tax deductions) until September 30, 2003.

This seems to capture the spirit of the rule, which limits the amount of income to be deferred. Since there is no income until September 30, 2003 (which will be reported with the Partners December 31, 2003 Tax Return), the amount of income reported on that return can only be deferred to the extent of deferrals made related to the Partnership Year. Put another way, any deferrals made in October 2002 did not offset a Calendar 2002 Tax Liability, so they did not count against the 2002 402(g) limit. Is this a correct understanding?

Sorry for the length, I just wanted to make sure I understood the concept.

[Earl]

this is it i think

Notice_87_13.doc

[Guest Chaffee]

Thanks, Earl!!

[jquazza]

I thought Partners who wanted to make deferral contributions up to the tax return deadline of the partnership could, however, they needed to make a formal written election before the end of the plan year (which could be contingent on the partners'income.)

[Guest Chaffee]

I think you are correct. To qualify as a cash or deferred arrangement, the income must not be currently available. Under 401(k)-1(a)(6), the Partner's income is available on the last day of the partneship year, so they cannot make the election after that day.

My concern was that deferrals were being made into the trust in Calendar 2002, but were being treated as 2003 deferrals for 402(g) purposes. According to my understanding of the responses, it seems that since all the related income was being earned on September 30, 2003, the related deferrals were deemed made on that same day for 402(g) (irrespective of when actually funded into the trust).