401(k) Deferral Deposit Deadline - Self-Employed Individuals

[Guest notapensiongeek]

We have a 401(k) Plan with three doctors, each has Schedule C income (no W-2 income). There are other employees (paid via W-2) that participate in the plan.

It is our understanding that because this is a Title I plan, the 401(k) deferral deposit deadline applies to the self-employed individuals as well as the employees. So, if one of the doctors didn't defer the maximum during 2006, (s)he can't fund the additional deposit now in order to get to the max for 2006 (even though it's still before the due date of his/her tax return). If the deposit is made now, it's considered a "late deposit" and is subject to the 15% excise tax, "lost earnings" calculation, VFCP submission, etc.

Are we correct in our assumptions? All of the regs I can find regarding the timing of deposits for self-employed individuals imply that the plan is not subject to Title I (in which case they have until the due date of their tax return to make the deposit). Where can I find this this in the regulations?

Any input would be greatly appreciated.

Thanks!

[Bird]

The first issue that needs to be resolved is "what did this participant elect to defer for 2006?"

That election should have been made before his/her income was earned. i.e. 12/31/06. If you have an election saying $15,000, and $10,000 was deposited, then $5,000 needs to be deposited and if that's the case I agree that it's a late deposit. Whether the DOL cares about late deposits for self-employeds or not, I don't know.

I have my self-employeds make an election (of a dollar amount, not a percentage of pay) by Dec 31 and make them put the money in in early Jan, to avoid this issue. I can't say I have great success in getting my clients do what I tell them, but so far they've listened on this issue.

This has come up before and someone usually argues that you can't make the contribution until you know what their income is. That may be true (if it's a percentage of pay) but I don't see how that voids the clear language concerning late deposits. As noted, I'm not sure the DOL cares.

[Tom Poje]

the reg cites are :

[1.401(k)-1(a)(6), 1.401(k)-2(a)(4)(ii)]

remember, deferrals are included in the test if made no later 12 months after plan year end - of course as long as it relates to services and comp for that particular plan year.

compensation is treated as received on the last day of the partners or sole proprietors tax year.

so it is my understanding that you have up until that point to deposit the deferral. the regs clearly say that an elective contribution made by such individuals are treated as alocated to their account for the plan year that includes the last day of the indiviudlas taxable year.

in the preamble to the final regs, somewhat of the reverse of the question was asked

if comp really isn't treated as received (that is 'currently available') until the last day of the tax year, then how is it possible for the individual to defer during the year, since no comp was in fact currently available.

the IRS made it clear that timing of contribution would not prevent a partner from deferring - but one did have to make sure there was sufficient income to make sure there was no 415 violation.