Sole Prop 401k w/ employees - timing of S. Prod elective def

[Guest johnpetrancosta]

I have read prior posts on this subject but remain unclear as to the conclusion. We have a sole proprietor client with a few long term employees who sponsors a 401k plan. All employee deferrals are timely deposited into the plan. The sole proprietor makes his deferral election by the end of the calendar year.

However, his self employement income can not be accurately calculated until after year end - usually in March or April.

Questions:

1. When does the deferral for the sole proprietor have to be deposited into the plan?

Options:

a. by 12/31 - seems impossible.

b. by 1/15, assuming it was not administratively feasible sooner - seems impossible

c. as soon as administrative feasible after determining his self employment income

d. 3/15 (heard something about a 2 1/2 month rule)

e. 4/15 (1040 due date)

f. 10/15 (extended date of 1040 and 5500)

2. Does the answer change for single person 401k plans?

3. Can you site any regs or rulings which address this point?

Thank you.

[Blinky the 3-eyed Fish]

1. The due date of the tax return, including extensions, if applicable.

2. No

The key is that the election on how much to defer must be in place by the end of the year as you mentioned is the case here. The election could even be something like - an maximum amount not to cause an ADP failure.

[Guest johnpetrancosta]

Thank you. Is there anything autoratative I can site? This issue has been quite devisive within our office.

[jquazza]

it's treas. reg. 1.401(k)-1(a)(6)(i)

[Guest Midas]

Here is a McKay Hochman Commentary on this issue:

The earned income of a self-employed individual or a partner is treated as being currently available on the last day of the individual’s taxable year. There is no guidance indicating an exact date by which the amount they are deferring must be physically deposited in the Trust. However, they must complete an elective deferral election form by the last day of the relevant tax year which declares the dollar amount or percentage of income to be deferred. This restriction does not prevent a partner or sole proprietor from deferring on amounts paid during the year as a draw on account of services performed by that self-employed individual; however, the owner-employee would have to show a profit for the contribution to be valid. A self-employed individual must make sure that amounts contributed during the year do not exceed statutory limits, such as the 415 limit, based on the individual’s actual earned income for the period. According to DOL guidance updated in 1996, the timing issue that normally applies to plan participants that requires that deferrals be deposited as soon as administratively feasible, but in no event more than 15 business days after the close of the month during which they were withheld, does not apply to partners in a partnership plan until after the time that the partnership would have otherwise distributed the amount to the individual partners.