Employee Salary Deferral Contribution Deadline for Solo 401(k)

[Guest marco100]

Hello All:

I am new to this board but I am hoping someone here can provide some guidance.

I am a sole proprietor/self-employed person with no other employees, unincorporated, Schedule C filer for the business income.

I do not draw a regular salary and my income stream throughout the year is generally highly irregular/lumpy.

I established an individual 401(k) plan (with Roth option as well as traditional/after tax contribs) in 2011 using Vanguard as the trustee.

I am very perplexed about what, exactly, is the contribution deadline for the employee salary deferral part of the plan. (I understand that the deadline for contributions by the employer/profit-sharing is the deadline for filing of the tax return for that tax year + extensions.)

I have done a search on the net (which is actually what brought me here) and found a couple of old threads here but I am not sure they addressed my particular question or if they would still be applicable at present even if they did address my situation.

On the net, I have seen various sources, some of which seem to indicate that: 1) employee salary deferral contributions must be made by December 31 of the tax year for which the contribution is made but others which seem to contradictorily indicate that: 2) employee salary deferral contributions can be made (for a self employed sole proprietor with no employees) up until the tax return filing deadline + extensions (i.e. same deadline as for making the employer/profit sharing contributions).

The latest version of Pub. 560 seems to have one and only one part which talks about employee contribution deadlines for qualified plans, but it's not clear that this language is intended to specifically apply to 401(k) plans, although I don't see anywhere else in the publication which has a different deadline for the employee contributions. The precise language from Pub. 560 is as follows (at page 15 of the pdf version of Pub. 560):

When Contributions Are Considered Made

You generally apply your plan contributions to the year in which you make them. But you can apply them to the previous year if all the following requirements are met.

You make them by the due date of your tax return for the previous year (plus extensions).

The plan was established by the end of the previous year.

The plan treats the contributions as though it had received them on the last day of the previous year.

You do either of the following.

You specify in writing to the plan administrator or trustee that the contributions apply to the previous year.

You deduct the contributions on your tax return for the previous year. A partnership shows contributions for partners on Schedule K (Form 1065), Partners' Distributive Share Items.

However, this language is before the section headed "Elective Deferral (401(k) Plans)" which starts on Page 16 of the publication. So I am not sure if the above section also applies specifically to 401(k) elective deferrals. But the 401(k) section starting on page 16 has no similar section specifically addressing when employee deferral contributions are deemed made as appears for "qualified plans" on Page 15.

Finally, in reviewing my Individual 401(k) Plan Adoption Agreement with Vanguard, the "effective date of the plan" is 1/1/2011 but the "effective date for elective deferrals under this plan" is 12/21/2011, since I did not actually sign the adoption agreement until that date, and according to the instructions, the effective date for elective deferrals could not be earlier than my plan adoption date.

So, my questions would be:

1. What was the deadline for making employee salary deferral contributions for tax year 2011? (I understand that any possible contribution for tax year 2011 is long since past as the max possible deadline assuming filing date + extensions would have been October 15, 2012).

2. What is the deadline for making employee salary deferral contributions for tax year 2012?

3. If there is written authority one way or the other i.e. stautory or IRC can anyone cite it?

4. Are there any sub-limitations on the timing of the employee deferral contributions within the overall deadline (assuming a conclusive final overal deadline for employee deferral contributions can be established)?

Thanks to everyone for reading this and for any and all help/opinions that anyone can provide.

[K2retire]

If your deferral election is a percentage of pay, it is not possible to know what amount that will be until your Schedule C is calculated. If your deferral election is for a specific dollar amount, that issue is solved. If there is a possibility that you might have a loss for the year, you won't know if any deferrals can be made until that is determined. For those reasons the general rule is that a self-employed business owner has until his or her income from the business has been determined to make both employer and employee contributions.

[Guest marco100]

If your deferral election is a percentage of pay, it is not possible to know what amount that will be until your Schedule C is calculated. If your deferral election is for a specific dollar amount, that issue is solved. If there is a possibility that you might have a loss for the year, you won't know if any deferrals can be made until that is determined. For those reasons the general rule is that a self-employed business owner has until his or her income from the business has been determined to make both employer and employee contributions.

Thank you.

Is the date that the "income from the business has been determined" the date when the tax return is actually prepared? Let's say I get the six month extension and don't actually prepare the return until October 15 of the following year. Does that mean October 15 is the date that the "income from the business has been determined"?

Just how "fuzzy" is the standard, if you can say?

[Bird]

For tax purposes, I think there is no doubt that they are due for deposit by the due date of the business tax return.

There are other rules, enforced by the Dept of Labor, that say they are plan assets as soon as they are withheld, and must be deposited more-or-less right away; let's say 7 business days. If you are a sole proprietor, your self employment income is determined as of Dec 31. To be on the safe side, you would make the deposit within 7 business days of Dec 31. There's a school of thought that you can't make the deposit until you know your income (if a % of pay is used) and therefore can put it off until you do your Schedule C; i.e. much later. In any event, the DOL doesn't have jurisdiction over one-man (non-ERISA) plans, so not much will happen in any event.

BUT, it is important that you have an election in place by Dec 31. You really can't say after the end of the year, "mmm, it looks like I had a really good year and now I want to max out." And be careful with your elections; if you sign a form saying something to the effect of "I want to contribute the maximum" it would probably mean "...each and every year" so if you don't want to contribute next year you should sign another form saying so.

We just had a thread about how investment companies make it easy to set up plans but that's giving you just enough rope to hang yourself. If you really want to make sure things are done right, you should consult a plan professional (not necessarily an accountant) to oversee things for you. e.g. if you are doing Roth contributions, Vanguard will probably mush them all up with your other money, and someone should mathematically be keeping track of that source.

[Guest marco100]

For tax purposes, I think there is no doubt that they are due for deposit by the due date of the business tax return.

There are other rules, enforced by the Dept of Labor, that say they are plan assets as soon as they are withheld, and must be deposited more-or-less right away; let's say 7 business days. If you are a sole proprietor, your self employment income is determined as of Dec 31. To be on the safe side, you would make the deposit within 7 business days of Dec 31. There's a school of thought that you can't make the deposit until you know your income (if a % of pay is used) and therefore can put it off until you do your Schedule C; i.e. much later. In any event, the DOL doesn't have jurisdiction over one-man (non-ERISA) plans, so not much will happen in any event.

BUT, it is important that you have an election in place by Dec 31. You really can't say after the end of the year, "mmm, it looks like I had a really good year and now I want to max out." And be careful with your elections; if you sign a form saying something to the effect of "I want to contribute the maximum" it would probably mean "...each and every year" so if you don't want to contribute next year you should sign another form saying so.

We just had a thread about how investment companies make it easy to set up plans but that's giving you just enough rope to hang yourself. If you really want to make sure things are done right, you should consult a plan professional (not necessarily an accountant) to oversee things for you. e.g. if you are doing Roth contributions, Vanguard will probably mush them all up with your other money, and someone should mathematically be keeping track of that source.

Thank you.

I am concerned about the tax consequences, not the DOL.

What happens if a sole proprietor makes a salary deferral election for (alternatively): 1) A specific amount, say $X,000.00 or 2) A percentage amount, say X% of self-employment income, and makes the election by Dec. 31 of the applicable tax year. (Assume either way it's below the legal max which can be contributed, there is additional contribution "space" that is going unused at this point for the deferral.)

And let's even say the taxpayer figures his Sched. C. out and the rest of his tax return on December 31 so he "knows" everything he needs to know about his income.

However, for other legitimate reasons--assume he has done a partial Roth conversion but files for an automatic 6 month extension to Oct. 15 because he wants to give himself the opportunity to recharacterize the conversion depending upon what the Roth investment does.

What is the practical effect if the taxpayer makes an additional contribution as a salary deferral (not as the employer/profit sharing part, assume that space has all been used up). So IOW on Dec. 31 he elects a salary deferral of $5,000.00, in writing, and deposits the $5,000.00 contribution on Dec. 31. He then--having filed for the six month extension--either through inadvertence or stupidity (I'm not saying I did this by the way, I imagine it's not an uncommon scenario though) deposits another $5,000.00 as an elective salary deferral on September 10.

Would this be considered an "excess" salary deferral contribution? Would it be a taxable event? Is it correctable? Would it result in a disqualification of the entire plan?

In the practical/real world, what do people do if they make an "excess" deferral contribution? Do they have to withdraw it? Do they leave it alone and keep their mouths shut?

[Guest marco100]

....and as another follow-up question, can your deferral election be blended, i.e. a % of income "not to exceed" a fixed amount?

I.e. "15% of self employment income not to exceed $10,000.00". If so, when does the contribution have to be deposited?

[Bird]

If you put in an "extra" amount on Sep 10 2012, then just count it as a 2012 contribution.

Your election can be whatever you want it to be, as long as it is determinable. I have some clients that want a total contribution of, say, $20,000, and they make their salary deferral election "$25,000 minus whatever my required 3% safe harbor (employer) contribution is."

[KevinO]

IRS Pub 560 (2017) p.4 states "Owner/employees: The employee deferrals must be elected by the end of the tax year and then can be made by the tax return filing deadline, including extensions." Table 1, footnote 4 states that some plans that are subject to Dept of Labor rules may have an earlier contribution deadline, but says that self-employed 401k plans are not subject to the DOL rules.  

Table 1 also says the deadline for employer contributions is the employer’s tax return filing deadline, including extensions.

So, the deadline for contributing elective deferrals and employer contributions to a self-employed 401k is the tax return filing deadline, including extensions.

[Bird]

18 hours ago, KevinO said:

IRS Pub 560 (2017) p.4 states "Owner/employees: The employee deferrals must be elected by the end of the tax year and then can be made by the tax return filing deadline, including extensions." Table 1, footnote 4 states that some plans that are subject to Dept of Labor rules may have an earlier contribution deadline, but says that self-employed 401k plans are not subject to the DOL rules.

I don't usually put too much stock in IRS pubs but that is, I think, well stated.  I'll stop equivocating on this issue...if I can remember where that came from. 

I'd caution that a self-employed 401(k) sponsor with employees is subject to the DOL rules, although it's not a tax issue.