timing of 401k deposits

[pmacduff]

ok - this one goes back a ways...I know there were posts, but have been unable to find them...

What, if anything, would happen if an Employer was making the 401(k) deposits on say, Wednesday, but the actual payroll check date is Friday? Wasn't there something in the Regs about this being a "bad" thing because participants were receiving an allocation to their 401(k) account prior to actually receiving their payroll $ ? Most paychecks checks are paid for time worked, so the employee has earned that money already.

Any & all thoughts appreciated.

[E as in ERISA]

The contribution can't precede the services. I think that's 1.401(k)-1(a)(3)(iii)©(1)?

[Tom Poje]

so, based on your situation, it is ok because the deferral are based on services already performed.

gee, bet the DOL loves that. deferrals deposited before the paycheck. careful, next thing they will expect everyone to do that. (again, in your case its the timing of the paycheck, not the services)

by the way, the preamble also says that "for an occasional pay period... deferrals made before services are performed...that are made for bona fide adminstrative considerations and are not made early with a principal purpose of accelerating deductions...(would not fail regulatory requirements)

[Kevin C]

It would depend on which days are being paid for in that paycheck. If they pay on Friday for service performed through the prior Friday, they would be ok. But, if the paycheck covers service through the paydate, it would be a problem if you deposited early on a regular basis.

[Mike Preston]

This is one of those circumstances where no good deed goes unpunished. Since the monies are not made available to the participants as of the date that they are deposited, they are technically not salary deferrals. They are technically employer contributions subject to all the rules of employer contributions, not salary deferrals. Of course, this means that the salary deferrals were never contributed and the result is entirely illogical.

In a practical world, the DOL would view this as a positive thing and just ignore it, even if it did violate one or more technical requirements.

In a practical world, the IRS would view this as a positive thing and just ignore it, even if it did violate one or more technical requirements.

We do not operate in a practical world. We operate in a world where technical requirements are more important than anything else. Period.

Tell the client to stop doing this.

No good deed goes unpunished.

What you are looking for, as far as the "bad thing" goes, is the rules that were put in place due to the KPMG "trick" of depositing all of the salary deferrals expected to be deposited before the end of the plan year (think 6/30 tax year, 12/31 plan year) and then taking a deduction on the 6/30 tax return.

The regs are meant to stop that practice. They aren't technically meant to stop the "1 or 2 day in advance of the paycheck" deposit; unless, of course. the deduction is advanced into an earlier tax period than would otherwise be allowed.

More than you wanted to know, huh?

Tell the client to stop doing this.

[namealreadyinuse]

Doesn't the pte for interest free loans apply?

[austin3515]

M PReston -

I thought the regulations stated that the deposits would be considered profit sharing if made BEFORE the services were rendered? So if they're after services are rendered but before pay-date, you should be okay. Once the service is rendered, it seems that the Plan has an inevitable right to the assets (and the amount can be determined), even if the pay-date has not yet passed.

So you run payroll Wednesday, doesn't it seem logical to send the money in on Wednesday? Even if pay-day is Friday? I think most pay-period depositers do it this way...

[Mike Preston]

I agree that if the services were already performed, the regulation appears to provide an out. Even if not performed, if it is an exception for a valid purpose, the regulations go on to say that as long as it doesn't result in acceleration of deductions, that should be ok, too.

But if it is habitual (and therefore not subject to the adminsitrative exception) and if the deposits are made on Wednesday with respect to a paycheck that would not be delivered to the participant until Friday and if that paycheck is for compensation through that Friday which is two days after the date that the amounts were deposited, I still think there is a problem.