Operational Logistics

[Gary]

Much of my time with small plans has been spent determining funding requirements, performing non discrimination testing and plan design for defined benefit plans and defined contribution plans. It also includes plan admin work for defined benefit plans. However, it hasn't consisted of the day to day operation and administration of small 401k profit sharing plans.

With that said, I intend to present what I see as a practical approach to handle the implementation of a new 401k profit sharing plan. Of course, in addition to information I receive at this web site I will do my own independant research.

I have a client who is a (S Corp) business owner with about 20 or so eligible employees. The client has just adopted a 401k profit sharing plan effective 1/1/09.

Below is what I consider a potential way to handle some of the plan implementation aspects.

1. Assistiing client with setting up a master account and participant sub accounts at Schwab.

2. Will provide the eligible employees with i) SPD, ii) salary deferral forms, iii) beneficiary designation forms, iv) Schwab participant account appplications and v) notice to employees for det letter filing

3. For the owner, other than choosing to receive cash or deferring it, are there other methods used to enable the owner to make a deferral? That is, say the owner is scheduled to receive $5k in compensation for the remainder of 2009, this means that she can only defer up to 5k. Given it is a small closely held business I am wondering if there is any flexibility from a practical perspective.

Curious to hear observations of the above mehods of implementing the new plan from an operational and practical perspective.

Thanks.

[BG5150]

Can she give herself a $11,500 "bonus" and defer 100% of that?

[Gary]

That's what I'll suggest. Thanks. Like the Bart Simpson figure ;-)

[K2retire]

Many S corp owners have been taught to avoid taking a salary, in favor of paying themselves dividends, in order to avoid FICA and Medicare taxes. Remind them that they can only use W-2 compensation for plan purposes.

[Gary]

Focussing on the 401k aspect again:

Say an small closely held entity wants to implement a 401k profit sharing plan prior to 12/31/09.

1) I believe the only way to handle the CODA for the owner is that he must receive compensation in 2009 AFTER the plan is adopted and choose to defer some of that compensation if he wants a 401k deferral for 2009. That is, it is clear that an owner cannot just pay some of his own money into a 401k plan and then reduce his W-2 compensation for 2009, instead of deferring additional compensation for 2009.

2) Is it reasonable for the owner to defer future 2009 compensation into a temporary checking account and then move that money to an actual 401k retirement account if setting up the 401k account prior to 12/31/2009 is not logistically feasible?

3) And finally, my understanding is that a sole proprietor who receives Schedule C earned income (and not W-2 compensation) can actually wait until the due date of their tax return to make their 401k and/or profit sharing contributions; unlike with W-2 comp that requires it be received in cash or deferred at the time it is paid?

Thank you for assistance.

[Bird]

What about testing on the 401(k) contributions? You can use the deemed 3% NHCE ADP so the owner can do 5%, but that's it; it sounds like this was set up too late to be a safe harbor.

And who is reconciling the Schwab accounts? Unless you are getting true consolidated reporting from Schwab, that sounds like a lot of accounts to keep track of.

For your specific Qs:

1) I believe the only way to handle the CODA for the owner is that he must receive compensation in 2009 AFTER the plan is adopted and choose to defer some of that compensation if he wants a 401k deferral for 2009. That is, it is clear that an owner cannot just pay some of his own money into a 401k plan and then reduce his W-2 compensation for 2009, instead of deferring additional compensation for 2009.

Correct.

2) Is it reasonable for the owner to defer future 2009 compensation into a temporary checking account and then move that money to an actual 401k retirement account if setting up the 401k account prior to 12/31/2009 is not logistically feasible?

You don't have to have the 401(k) account set up by 12/31/09. If the company simply holds the money until it can be deposited into a plan account, it is not a qualification or deduction problem, although you could wind up with late deposits. You could indeed set up a temporary plan account to hold the money until the regular plan accounts can be established. That's a pain and whether it's better to do that or just have some late deposits depends on who is doing the work and who is getting paid.

3) And finally, my understanding is that a sole proprietor who receives Schedule C earned income (and not W-2 compensation) can actually wait until the due date of their tax return to make their 401k and/or profit sharing contributions; unlike with W-2 comp that requires it be received in cash or deferred at the time it is paid?

Certainly PS can wait. I consider self-employed deferrals made more than 7 business days after 12/31 to be late - deductible, but subject to late deposit corrections. There's a school of thought that self-employed deferrals aren't known until self-employment income is determined, well after the end of the year, and therefore can be made up until the tax return due date without consequence, but I find that argument pretty weak. Certainly if a dollar amount is elected, knowing self-employment income doesn't affect the amount. On the other hand, I don't know if the DOL cares about self-employed deferrals being late anyway.