Earned income

[Guest babs51]

A doctor with employees is terminating his 401(k) plan effective 11/6/09 - plan is calendar year. He is a sole proprietor. No one has made deferrals during the year. He will be required to contribute the SH 3% through 11/6/09 for his eligible employees.

He has taken some money during the year but of course his taxes will not be prepared until into 2010 and he would like the plan paid out before the end of the year. Does he owe anything for himself? When is a sole proprietor's earned income really earned - end of the year?

Any thoughts would be appreciated. Thanks.

[12AX7]

If no one has made any deferrals during the plan year and if there are no other contributions or allocations to the plan (including forfeiture allocations) to a key employee, then no Top Heavy minimum is required to any other eligible non-key employee (assuming the plan is Top Heavy).

Compensation for the Sole Prop is detemined when the Schedule C is finalized. I'm not sure what you mean that this person has taken some money during the year. Hope this gives you some guidance.

[david rigby]

If necessary, amend the plan to make sure the 09 contribution for all HCE's (or Keys) is zero?

[austin3515]

If necessary, amend the plan to make sure the 09 contribution for all HCE's (or Keys) is zero?

Don't know how you could legally do that... Cut-back rules apply to the owners too.

Here's a thought though, you know how they deem Sched. C comp to be earned on the last day of the plan year? You could use that to your advantage here, and say the Plan is terminated before he was credited with any comp!

I like it...

[12AX7]

There would be no cutback if the contribution had not yet been earned or accrued (e.g. last day requirement) at this time. In either event, I like your idea but never had the chance to implement it. Not sure how many owners would only want to make only a contribution to the employees.

[austin3515]

a) there';s no last day rule on the safe harbor, so it would be a cut-back.

b) I got the impression from the "OP" that the goal was to not receive the SH. He/she phrased it as "Does he owe anything for himself?"

[12AX7]

You're right. I misread "SH" as "TH". My bad.

[austin3515]

Interesting that you mention that point, which I think is absolutely crucial (though not to the OP;).

If the Plan Year has not yet ended, and the sponsor must avoid a top-heavy minimum, plan termination solves the problem.

Where this is important is if the Plan wants to discontinue it's safe ahrbor mid-year. If the Plan is top-heavy, plan termination is required to avoid the THM.

[Kevin C]

The plan only stays SH for the final short year if the plan termination is in connection with a 410(b)(6)© transaction or the employer incurs a substantial business hardship. (1.401(k)-3(e)(4)). If they don't stay SH, the TH exemption is gone, too.

[austin3515]

But of course the 3% SHNEC satisfies the THM (OK, almost always...)...

1) Comp as a participant

2) dual eligibility

are the two situations where that would not be the case...