401k elective deferrals

[Gary]

THIS IS POSTED IN THE 401(K) FORUM!!! - BLINKY

A one participant corporation has a 401k plan.

Their fiscal and plan year end are 1/31/07.

The owner/participant took compensation of $50,000 all taken in January 2007.

The owner now wants to make a 401k deferral for the 1/31/07 plan year end that would thus be a reduction to his income for the 2007 individual income tax return for this individual.

My understanding is that the elective deferral should have been made by Feb 15, 2007 to be applied to the 1/31/07 plan year.

A pension attorney says that in this case the owner/participant can wait until the due date of his corporate return (with extensions) of 10/15/07 to make the 401k deferral to the plan since it is for the owner. As opposed to a common law employee.

Does anyone know the correct answer and know where the authority on this matter is (i.e. code, reg, etc.)?

I believe for an unincorporated self employed person (using Schedule C of 1040 for business) he would have up until the time of his tax return is due; this works nicely because we are dealing with the same one return, that being the 1040 so that makes some logical sense. But I don't know that such a liberty is allowed for a incorporated business as discussed above.

Thanks.

[wsp]

I'll take a stab at this....

If the election to defer wasn't in place prior to the end of the plan year then it's my understanding that you can't make an elective deferral regardless of when it's contributed and you're limited to the 10k in profit sharing (assuming that your plan doc provides for that). Source: Final 401k regs.

If you do have an election in place prior to year end then for IRS and deductibility purposes you have until the end of the tax return due dates plus extensions. However, the DOL says that it should be deposited as soon as can reasonably be segregated which is the 15 day rule. But there are those who would argue that the date is impossible as it's not usually been calculated yet. Depending on the amount in the election, you may be able to prove your case there. If you elected a fixed number and knew you were going to make far in excess of that amount, your case may be more difficult to prove.

[SoCalActuary]

Two comments:

1. This is not the 401k forum.

2. The sole proprietor does not even know what the income is until the tax return is prepared. So they cannot even know what the allowable contribution is by Feb 15.

[Mike Preston]

Reading is such a lost art.

Didn't the OP say this was a corporation? What part of corporation and sole proprietor belong in the same thread?

If 50k was the comp, then the profit sharing deduction available is 25% of that, or 12.5k, right?

Assuming there was an election in place as of the date that the compensation was paid, the deferral is due. If it is late, calculate and pay the late amount pursuant to the DOL website and be done with it.