Mechanics of funding deferrals of partners in a partnership (law firm)

[Guest Melissa Winslow]

I have a takeover DC plan with a plan year end of 12/31/99. The plan allows for deferrals, match and profit sharing. The plan has 12 partners and about 15 rank and file folks.

8 of the partners fund their deferral elections throughout the year against the monthly draws they take. These deferrals are remitted within the confines of the 30 day rule.

4 of the partners write personal checks to fund their annual deferral amount. These checks appear to have been cut anywhere between the first day of the plan year and March 15, 2000.

My question is two-fold:

1) Can partners write personal checks to fund their deferral elections without it being construed as an after-tax contribution?

2) If the answer to the above is yes, when must the funds be deposited in order to be deductible on the 12/31/99 K-1?

[Jon Chambers]

Without having a specific cite, I'd be incredibly surprised if writing checks is permissible. I've heard of deferrals being deducted from a year end distribution, but I've never encountered check writing. I'd suggest these attorneys need to hire some ERISA attorneys to help them through the correction procedure.

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Jon C. Chambers

Principal

Schultz Collins Lawson Chambers, Inc.

(415) 291-3004

[Guest JAREL]

Partners writing checks may not be a problem although I haven't seen this before. The payments they receive from the partnership (sort of a draw, or guaranteed payments) are not considered earned income until the last day of the year for purposes of the 401(k) plan. Therefore, there may be no constructive receipt at that point. I know of many partnerships that allow partners to contribute (though not by writing personal checks) out of guaranteed payments during the year but the risk is that they may overcontribute when they find out their actual income is less than expected. This situation is unlike an employee, who is in constructive receipt of the compensation when paid to him or her, thereby eliminating the prospect of an employee writing personal checks for the deferrals.

[Guest lforesz]

I have these types of partnership issues quite a bit. I have always thought the deferrals had to be made to the plan by March 15th of the year following. I always assumed it related to the ability to defer on compensation earned up to 2 1/2 months after the end of the plan year. Does anyone know what the actual due date is for actually depositing the 401(k) deferrals into the plan? I know the election has to be made before the end of the partnership's taxable year, but I assume "election" differs from the actual contribution. Any thoughts would be greatly appreciated.

[Ervin Barham]

As far as the partners writing personal checks, that is a no-no! A long time ago in the early days of partnership 401k's (1988 or so), I found about the same time that the partners were writing personal checks and that the IRS was auditing the plan. To make a nervous TPA story short - the IRS did not disqualify the plan, but you can believe the partners never did that again. Jon is right about his advice since the advent of EPCRS.