Self-Employed Owner and payroll period match

[Guest HMoore]

I have a plan where the match is calculated on a payroll period basis.

The owner of the company is self-employed, but receives draws and makes deferrals on those draws during the plan year. A match is deposited during the year based on those draws.

For any other employee, I would not true up a match made on a payroll period basis, but what about for a self employed individual? Technically, they don't receive their earned income until the last day of the plan year.

Should I be trueing up their matching contribution?

Does anyone know of anything in the IRS code, notices, plr's, etc that addresses this?

Thanks!

[JanetM]

What does the document say about calculating match? Bases on total comp and deferrals or on payroll basis?

[Guest HMoore]

According to the doc, the match is calculated on a payroll basis.

Incidentally, it's a safe harbor match, but I don't think that matters for purposes of this discussion.

[Bird]

I'd say a self-employed has one payroll period: 1/1-12/31.

[AlbanyConsultant]

I'd say a self-employed has one payroll period: 1/1-12/31.

Bird, then how is the s/e participant able to defer during the year? They are not making a contribution based on an election form (which presumably asks for deferrals on a payroll basis, not annual).

I too have a safe harbor match plan, and I stumbled onto this problem by trying to advise how to calculate the s/h match (100% of the first 3% plus 50% of the next 2%) on the partner's deferral, calculated on a payroll basis w/ no true-up.

Search can be your friend!

[Leopurrd]

I agree with Bird. Here is an excerpt from the Final 401(k) regulations:

"One commentator asked for clarification of the interaction between these timing rules and the rule under the regulations that treats a self-employed individual’s earned income as being currently available on the last day of the individual’s taxable year and whether this last day rule precludes a partner from making elective contributions during the year through a reduction in the partner’s draw. The restriction on the timing of contributions is not intended to prevent a partner from deferring amounts that are paid to the partner throughout the year on account of services performed by the partner during the year, and the final regulations have been modified to clarify this point. However, self-employed individuals who take advantage of this opportunity to defer amounts during the year must make sure that the amount contributed during the year will not exceed the limits (such as the limits of section 415) that will apply to the individual, based on the individual’s actual earned income for the relevant period. "

I take that as the income is earned at the end of the year once the tax return has been prepared, but the IRS does not count the deferrals from the draws as pre-funding (which is prohibited in the final regs). The self-employed participant in the plan would need to be sure that any expenses or other accounting entries did not put them below their deferral, or they would have a 415 overage.

Vicki

[AlbanyConsultant]

OK, Leopurrd, but then how do you match on that deferral? There's no real compensation to base the formula on.

Obviously, the easy answer is to allow for true-ups, but we can only lead the horse to the water; we can't make it drink!

[Leopurrd]

I agree - there's always some sort of interpretation involved in these regs!!! I would guess that payroll period match (since in a SH is required to be deposited by the end of the next quarter) would be based on their SE income - so you would not deposit until year end, since they have no actual "income" until then, only draws???

I would think that you could also base it on the draws but overall their only payroll is their SE wages, which you don't know until end of year, so would require an adjustment after their tax return has been filed.

But, IANAL so don't quote me on that! I only know what I read in the regs.

Vicki

[E as in ERISA]

First you need to do a true up on the deferrals. The draw is completely irrelevant for tax purposes. He could do a draw of $10,000 per month but actually make $30,000 or $500,000. The deferral election has to be applied to the final self employment income, not draws. Then you true up the match accordingly.