2005 401(k) Plan in 2006

[Guest jetfaninmn]

I have just had a discussion with an accountant. He is claiming a single life qualified 401(K) Plan can be set up in 2006 for 2005. It is a January 1 to December 31 plan year. I need to find a site where I can cut and paste to show him that it must be set up in the plan year it is for. Unless....

Thanks

[E as in ERISA]

Maybe he's just talking about a SEP. That's not technically a "qualified plan" or 401(k). But if he's not trying to deduct more than about 15% of net compensation, that may be what he's thinking about. IRA-based plans -- including SEPs -- are the only ones that you can generally set up after plan year end.

[saabraa]

Try Internal Revenue regulation section 1.401(b)-1(a) for the cite.

SEPs can now deduct up to 25% of net earnings.

[Guest jetfaninmn]

Thanks for the help!

[Lame Duck]

Also see Rev-Rul. 81-114.

[GBurns]

The issue hangs on the term "set up". Although the "trust" has corpus even if not yet funded, Is there a "trust" or is there "corpus" if there is no intent, plan, plan document or any other thing that establishes the "trust" prior to the end of the year?

In the described scenario, everything from conceiving the idea to the funding occurs after the end of the year.

But then again, who will know if documents are backdated?

[Guest mjb]

There is no need to set up a Q plan for 05 since the client can establish a SEP by 4/15 or 10/15 which allows the same deductible contribution of up to 42k with a lot less admin work. Only difference is that SEP does not have additional 14k deduction for salary reduction contribution which can be taken in 06 if a 401k plan is adopted.

[namealreadyinuse]

It is still too late to establish a SEP from scratch for 05 isn't it?

[Guest mjb]

Seps can be established anytime up to the date the tax return is filed with extensions. IRS pub 560 P 6.