401(k) Plan and Sole Proprietor

[bzorc]

Sole-Proprietor sponsors a "uni-k" for himself, in order to make an elective deferral and also benefit from the 20% deduction for profit sharing. As of today, the sole-proprietor has not made any elective deferrals for 2005. Can the sole-proprietor still make an elective deferral for 2005? The profit sharing portion is still allowable, as the Form 1040 has been extended to 10/16/2006.

Any replies would be appreciated.

[WDIK]

Can the sole-proprietor still make an elective deferral for 2005?

Such an election should have been in place prior to the plan year end.

[Belgarath]

But don't be surprised if the client "finds" such an election in his files once you point out that without it, he cannot do a deferral. I am constantly amazed, and sometimes horrified, at the number of documents that clients have in their files when it suits their purposes. We've even had requests to "prepare a specimen so I can see what it looks like when I'm looking through my files." We draw the line in the sand on that, and flatly refuse to have any involvement in such foolishness.

[austin3515]

Jeez, I would think your client's deserve the benefit of the doubt! A specimen sounds like a perfectly reasonable request to me...

[jpod]

Has there been any guidance (formal or informal) from IRS has to what a sole proprietor needs to do to make an "election" before the end of the year? I'm talking about an unincorporated sole proprietor, not a partner in a partnership. Does the sole proprietor have to send a letter to the trustee or custodian of the plan before the end of the year expressing his/her intention to make an elective deferral? I don't think the regs. say that. Can this be done simply by having the sole proprietor sign some piece of paper before the end of the year and sticking it in a drawer? Does it have to be witnessed or notarized?

While I know what to tell client to do before the end of the year in order to be safe, now that the year is closed I think it is reasonable to wonder what overriding policy consideration would require a sole proprietor to have written some silly note to himself or herself before the end of the year.

[Bird]

jpod-

Anything in writing is sufficient, IMO. An enrollment form looks the best, but I think it's perfectly OK to just scribble a note, as long as it covers the important points ($ or % to defer, for which pay period, plan name, employee name). I don't think it has to be notarized or even witnessed. And it doesn't have to go anywhere other than his/her own drawer.

As for policy considerations...a lot of what we do seems (is) silly, yet this makes perfect sense to me. I can't explain that thinking.

[rcline46]

For sole proprietors and partners it is a stupid fiction. For a CODA to be effective, one must agree to make the deferral before the income is constructively received. We all know that.

Since the income for these entities is DEEMED earned on 12/31, then there must be an election in place by 12/30 on the anticipated deferral. It matters not that the income will actually be determined some time in the next year.

That only leaves the issue as to WHAT the election says - %, $, or MAXIMUM PERMIITED UNDER LAW. There are many opinions as to which is best or even permitted.

[jpod]

rcline46: I don't think it's a fiction or least quite the same fiction for a p/s. A p/s is an entity, so each partner would make his or her election by giving some writing to the p/s, a third party. I think it is implicit in the regulations that there must be some written communication to the entity that pays the compensation or, in the case of a p/s, through which the compensation is earned, in order for there to be an "election."

[Guest mjb]

Since partners never know what their deferral amount will be by the end of the year, they fill out the election form stating that they ellecting to defer maximum amount allowable under the tax law unless they want a fixed amount and return it to the plan administrator.