Sole Proprietor Salary Deferral

[Below Ground]

What is the last day on which a Sole Proprietor can deposit his or her "salary deferral" to a 401(k) plan? I understood that this is not the standard timing as used for employees. Is it 2 1/2 months after the plan year ends, provided that it is from income of that period, and a written election for the deferral was filed before the close of the plan year?

[Lori Friedman]

The due date of the income tax return -- in this situation, Form 1040 -- including an extension (10/15/07).Because you're asking about a 401(k) plan, you don't have an issue with the qualified plan minimum funding rules (8-1/2 months, or 09/15/07).

Many taxpayers extend their returns for the sole purpose of needing more time to make a plan contribution.

[Blinky the 3-eyed Fish]

Well while I will acknowedge there is probably widespread noncompliance and it is doubtful the DOL would or should care too much since we are talking about the owner of the business, the reality is the deferrals must be deposited ASAP once income is known. The same timing rules apply to sole proprietors as do employees, it's just they are given the extra time to figure out their earned income. But once that point is reached, it's time to pony up.

[Tom Poje]

this is described in the new 401k regs

Sole proprietor and partners (1.401(k)-1(a)(6), 1.401(k)-2(a)(4)(ii))

[Below Ground]

Tom, thanks for the cite. Could you quickly summarize for me?

[Bird]

I think the cites are saying that compensation is determined as of the last day of the year.

My take on the deposit deadline is that they could indeed by made and deducted as late as the tax return due date. If they are deposited after the earlier of "[paraphrased - as soon as they can be separated from the employer's assets, or the 15th business day of the following month]" then they are late according to the DOL, and it would appear that they (the employer) should add earnings. Whether the DOL cares or not might be another matter.

[Below Ground]

Found the answer to my own question. According to the McKay Hochman FAQ Section, this issue was clarified by the Final 401(k) Regs. They say...

#1 Monies are NOT considered available until end of tax year. I believe this means that no prefunding is allowed.

#2 Provided that a written election was made before the end of the plan year, the deposit deadline is the due date of the applicable tax return, plus extensions. (Thanks Lori!)

Anyway, thanks for your replies.

[Guest mjb]

Most partners do not deposit contributions to a 401k plan by year end- the deferral is taken out of the partner's share of the firm's profits for the fiscal yr which is usually not determined until the firm's tax return is filed with the IRS, 2 1/2 months after end of yr or 8 1/2 months with extension and after the partner receives a k-1. After the partner's share is determined the p'ship will remit the partner's contribution to the plan from the partner's share on the K-1 and the partner deducts the contribution on line 28 of the 1040 which can be filed as late as 10/15. To avoid excess contributions most partners contribute a flat dollar amount or the max $ permitted under the ADP % for HCEs.

[Tom Poje]

the preamble to the final regs says the following. anything in CAPS is my own emphasis.

"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 servcies performed by the partner during the year, and the final regulations have been modifed to clarify the 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 ondividual, based on the individual's ACTUAL INCOME for the relevant period.

http://www.ustreas.gov/press/releases/repo...22804td9169.pdf

here is the link to the entire text of the final 401k regs, including the preamble. in particular, pages 12-13 deal with this question.

print a copy of this! or at least the preamble. it helps.

[Below Ground]

Thanks Tom! That really cleared up one final concern I had. Beautiful! Thanks!