sole proprietor/partnership 401(k) Plan

[Guest tajcc]

If the entity is a sole proprietorship or a partnership and they make an election to defer the maximum allowed by law by 12/30/2006, when does the deferral have to be deposited by - the due date of the entity's tax return?

Thank you.

[John Feldt ERPA CPC QPA]

According to the IRS, yes - including extensions to the tax return - as long as a deferral election is in place by the end of the year.

BUT, if the plan is subject to ERISA, then according to the DOL, the deposit must be made as soon as the amount can be reasonably segregated from the assets. For example (I'll use a partnership), the DOL feels that a Partner's deferral election should be done by the end of January (if it's a calendar year tax year). In the preamble to 29 CFR Part 2510 they stated that in their view, the partners' deferrals become plan assets at the earliest date they can be segregated from general assets after those amounts would have otherwise been distributed to the partner.

It seems possible that a partner's or sole proprietor's deferrals could be deposited at the same time the tax return is filed, but I've seen no official statement from the DOL for that.

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[Guest mjb]

Most partnerships cannot make contributions by the end of Jan. because they don't know what the partners income is at that time. Many partnerships determine the amount of the 401k contribution for partners on the date the tax return is filed which is the first day that the deferrals can be segregated from the partnership income by the employer.

You care to enlighten the rest of us as to why you think a C230 disclosure is reqiured on your response? The second sentence is mystifying considering that you dont know who is the party to whom the advice was originally directed. Please explain.

[John Feldt ERPA CPC QPA]

Yikes! Sorry mjb, that was posted for levity sake only, my apologies to you.

(obviously a benefits board like this needs no disclosure)

[Bird]

Most partnerships cannot make contributions by the end of Jan. because they don't know what the partners income is at that time. Many partnerships determine the amount of the 401k contribution for partners on the date the tax return is filed which is the first day that the deferrals can be segregated from the partnership income by the employer.

...but no later than 15 days after the end of the month during which the amount was withheld. I don't think the "we can't figure it out" reason nullifies this clause.

I tell our partners to elect a dollar amount and deposit it early in Jan. and avoid the whole issue that way.

[Guest mjb]

Its not possible where partners draw during the year exceeds amt of pship share and partner has to refund excess to the pship when partner's shares are determined by the accountants. The rule is that the conbtribution is not due until the earliest day the deferrals can be segregated which can be the date the firm tax return is filed and partners receive their K-1s. No agent has ever quibbled with this issue.

[Belgarath]

I agree with MJB. It isn't always reasonable to do it earlier, (yes, I know, the DOL isn't noted for being reasonable) but I, too, have yet to hear from any credible source that this practice has been challenged.

[Bird]

I don't dispute that it hasn't been challenged but I maintain that any deferrals deposited more than 15 days after the end of the year are "late" - that doesn't impact their tax status but means that lost earnings should be added.

[Belgarath]

Yeah, we'll just agree to disagree on this one. You may be right. I'd maintain that they can't possibly be "late" if they can't be deposited into the plan, and they can't be deposited into the plan until the income can be known, because you can't "defer" income until you have income. And it may turn out that income is lower than the amount already deposited.

But heck, whatever works. At this point at least, I think this is one of those esoteric questions that we TPA's love to debate, which the IRS/DOL don't appear to find of any particular concern. Yet...

A Happy and Healthy Holiday Season and New Year to all! (I'm out from this afternoon to January 2, so I'm in a rather jovial mood this morning. No amount of wandering through obscure regulations can disturb my equanimity today.)