Processed Deferrals Early.

[Below Ground]

Client pays every Thursday. This year (2009), January 1st is a Thursday. Since Client was closed on the 1st, and payroll clerk was also taking off the 2nd (Friday), clerk processed payroll for the 1st on the 30th. She also processed deferrals from that pay (this is 2009 pay and deferrals -- not on 2008 W-2 Forms) on that day. Member investment accounts show money for these 2009 deferrals being deposited on the 31st. In effect, money was deferred prior to being earned. What should be done?

[GBurns]

I don't get it.

Payrolls are, as far as I have ever noticed, are paid AFTER the work is done. So payroll on January 1st 2009 is for work done in 2008. The work was done and the money was earned in 2008.

Shouldn't this be on 2008 W2 ?

If it is going on 2009 W2, I still do not see a problem. If constructive receipt causes it to be 2009 income then it is deferral from a pay advance. If you can make a acceptable deferral from partnership draw, SE advances etc, then why not from a payroll advance.

[K2retire]

If it was paid on December 30, why would it not be 2008 pay that should appear on the 2008 W-2?

[Guest Sieve]

Below --

I don't think this is a deferral prior to the compensation being "earned"--it probably had been earned, but, as George suggests, just not yet paid (since there usually is a gap between the end of the payroll period and pay date). As a result, this contribution is probably ok because of this lag between the completion of services and the actual payday.

Let's assume, however, that this employer actually pays for services performed through payday, and that a portion of this contribution on December 31 therefore was prior to the performance of services. Although payment of deferrals prior to the performance of services generally is not permitted (see Treas. Reg. Sections 1.401(k)-1(a)(3)(iii)©(1) and 1.401(k)-1(a)(3)(iv), the regs, lo and behold, actually cover this situation and permit the deferral to be paid into the trust before the performance of services if the occasional early payment is "in order to accommodate bona fide administrative considerations (for example, the temporary absence of the bookkeeper with responsibility to transmit contributions to the plan) and are not paid with a principle purpose of accelerating deductions" (Treas. Reg. Section 1.401(k)-1(a)(3)(iii)©(2)). Your scenario fits four-square within this exception.

Now -- deduction and ADP testing come to mind. So, my question, is--can this amount be considered 2009 W-2 compensation, or must it be 2008 compensation? (Besides not being an actuary or a TPA, I'm also not an accountant!) The fact that the reg. mentions the acceleration of the deduction leads me to believe that perhaps this deferral must be deducted in 2008--in which case wouldn't it be part of the 2008 ADP test (the year with respect to which, as a result of the early payment, the deferral amounts "[w]ould have been received by the employee . . . but for the employee's election to defer . . ."? (Treas. Reg. Section 1.401(k)-2(a)(4)(i)(B)(1).) If the deferral is deducted in 2008, then wouldn't the compensation also be 2008 compensation (as suggested by K2)? (My head is starting to hurt!!)

George -- W-2 amounts are always (or nearly always--CPAs chime in) based on payments made during the year, and are not based on amounts earned during the year. So, a Jan. 10 pay date for services performed from December 15-31, 2008 will appear on the 2009 W-2.

[Bird]

I would first determine which year's W-2 will reflect the pay and work accordingly from there. Unfortunately, I don't know that answer...I'd be inclined to think that it should be 2009, since that's the normal pay date. There are possible ramifications for SS taxes and whatnot and...well, we just don't know how that was handled. Bottom line is to let everything flow from that determination. If it means a negative accrual for the advance deposits, so be it. At least, that's how I would handle it.

[Below Ground]

Thanks for your replies; especially Sieve. I thought there was that exception for the bona fide administrative consideration. You gave me exactly the answer I needed.

George and K2Retire - See last paragraph of Sieve's reply. As stated in my OP, the pay was not to be "issued" on the date it was. The clerk ran checks early dated 1/1 for distribution on Friday, the 2nd. She also processed the contribution. As inferred by Sieve's reply, this does happen more than you would think. Regardless, I do appreciate your thoughts.

Bird - 2009 W-2. This, of course, ties in perfectly with Sieve's comment. It was a known factor, but you are right, it is a most critical factor for detrmination of how this should be handled.

Again, thanks all.