Deduct Next Year Deferrals This Year

[Guest Michael Spaid]

I have heard a rumor that someone out there is selling the idea that if a 401(k) plan sponsor changes the plan year end to December 30, the first year this change is made, the sponsor can deduct employee deferrals for the year end and for the new plan year the begins December 31 for the calendar year ending December 31. I have no idea how this could work. How could anyone possibly know what will be deferred by the employees next year? I would not even ask except my clients are being approached with this idea and are being told that the methodology used in a secret that will be revealed if the client signs up with the provider for the service.

[LCARUSI]

It's old news.

Assuming everything is currently calendar year:

If the client changes plan year to 12/30/99,then client could opt to deduct contributions for plan year 12/31/99 to 12/30/00 in the fiscal year 1/1/99 to 12/31/99 (because of the one day overlap)

[IRC401]

Deloitte & Touche LLP is selling the idea; I don't know who else is. The idea is at least ten years old and runs directly contrary to the IRS' position in Rev. Rul 90-105 (which is not a well reasoned rev.rul.).

Big Five accounting firms can't obtain patents or copyrights on, or claim trade secret status for, the Code, regs , and rulings. Therefore, they try to develope some secret methodology, the secret status of which they may be able to protect.

It is highly unlikely that whoever is selling the idea really has a secret methodology. It is more likely that your client has been approached by someone who doesn't understand what he is selling and has a sales script.

[LCARUSI]

Consider a side effect of this type of election (12/31 to 12/30 plan year):

You've effectively delayed the increase in the 401(a)(17) limit for a year - to the plan year starting on 12/31/2000 and ending on 12/31/2001.