401k deferral deposit deadline for owners of corp.

[Guest jc1457]

Hi,

I have a client that seems to think that deferrals for the owners of a corporation can be deposited at any time. SHe just informed me that if there is a cashflow issue, then she would always deposit the employees deferrals timely but that her own were not deposited until there was enough cash. She receives a w-2 and has 401(k) withheld with every pay period. Her 401(k) deposits are made whenever there is cash. When I tell her that this is not correct she says that she is not harming anyone.

Is she correct? I don't believe the regs distinguish between employee 401(k) and owners 401(k).

Thank you!

[401king]

Hi,

I have a client that seems to think that deferrals for the owners of a corporation can be deposited at any time. SHe just informed me that if there is a cashflow issue, then she would always deposit the employees deferrals timely but that her own were not deposited until there was enough cash. She receives a w-2 and has 401(k) withheld with every pay period. Her 401(k) deposits are made whenever there is cash. When I tell her that this is not correct she says that she is not harming anyone.

Is she correct? I don't believe the regs distinguish between employee 401(k) and owners 401(k).

Thank you!

When reviewing the regulations, I can find no distinction between the employees and the owners for the sake of the 401k deferrals and deadlines.

The fact is, there should never be a cashflow situation as long as the money is withheld from a paycheck that would have been otherwise payable to the employee (owner); how else would they be able to fund the paycheck is money was not withheld.

One way to look at it is that the owner is loaning herself the money until she "wants" to deposit it. If given the option, many employees would wish to "defer" from each paycheck, but then pay the money into the plan at their leisure -- might be difficult explaining that rationale to the client but that's certainly how I look at it.

[Guest jc1457]

[When reviewing the regulations, I can find no distinction between the employees and the owners for the sake of the 401k deferrals and deadlines.

The fact is, there should never be a cashflow situation as long as the money is withheld from a paycheck that would have been otherwise payable to the employee (owner); how else would they be able to fund the paycheck is money was not withheld.

One way to look at it is that the owner is loaning herself the money until she "wants" to deposit it. If given the option, many employees would wish to "defer" from each paycheck, but then pay the money into the plan at their leisure -- might be difficult explaining that rationale to the client but that's certainly how I look at it.

Thank you. I agree with everything you say. She was so confident this morning - That I just wanted to make sure there wasn't something I was missing.

[K2retire]

Many business owners believe that. I've never heard of a government auditor who will buy it.

[austin3515]

"One way to look at it is that the owner is loaning herself the money until she "wants" to deposit it. If given the option, many employees would wish to "defer" from each paycheck, but then pay the money into the plan at their leisure -- might be difficult explaining that rationale to the client but that's certainly how I look at it. "

What a great point... It's essentially a participant loan program just for the owner, without ratable repayments, not available on a non-discrimininatory basis, etc.

The good advice would be to do her 401k quarterly, after saving up for a few months. I think the DOL's late deposit contributions (while clearly violated) are the least of the concerns based on the quote above.

[GMK]

As I understand it, deferral money is not available to the company to use for its own purposes. The rules, which are the conditions that must be met to qualify for the tax deferral, require that deferrals be deposited into the participant accounts timely.

The owner has to recognize herself as two different persons, the plan sponsor/administrator and a participant. Although we understand her reasoning, the rules say that she does not have the option as a participant to delay the deferral deposit, even in order to benefit her company.

And not following the rules can result in fines and penalties that will really mess up her cash flow and possible loss of the tax deferred status (read: unhappy employees and owner).

I would recommend that she check on these rules with her plan advisor or the trust company, a pension lawyer, etc.