Elective Deferral Paid By Employee Ok?

[Guest new401kplan]

I’m the sole employee of a company (S corporation) that just established & adopted a 401(k) plan in December 2012. My 2012 annual compensation from the company was $96,000 ($8,000 was paid on the first of each month). The company who help me establish the 401(k) & whose prototype plan was adopted told me that it was Ok for my company to write a check for 25% of my compensation ($24,000) & deposit it to the plan, which my company did.

Since the plan also provides for employee deferral Roth contributions as well, they told me that even though the plan was adopted in December with an effective date of 12/19/12 that it was Ok for me to contribute $17,000 to the plan as an elective deferral Roth contribution for 2012. They said that since all my compensation was paid to me already for 2012 that I should just write a $17,000 check from my personal checking account & deposit it to the plan, which I did.

I’m now wondering if I did something wrong by writing a personal check to the plan instead of having it come from my company. Also, if the plan effective date is 12/19/12, how can the company pay elective deferrals to the plan for compensation paid before the plan was adopted? The plan document doesn’t contain any language making it retroactive to the beginning of 2012. Am I Ok with how I did things, or should I be concerned? If this is a problem, how do I fix it? Thanks.

[ETA Consulting LLC]

No way. You may not defer from Compensation you have already received. When you establish a plan in late December (and you are an S Corp), you should've bonused yourself an additional $17,000 (plus applicable FICA) and deferred the $17,000.

Good Luck!

[mwyatt]

Assuming that the effective date is indeed 12/19/2012 and not 1/1/2012 and a calendar year, there is a far larger problem looming: 415 limit. An effective date of 12/19/2012 and year end of 12/31/2012 gives a 13 day year, so you're operating with a dollar limit of $50,000 * 13 / 366 = $1,766. Oops.

[david rigby]

Good point. Probably the first task is to verify plan's effective date, which is not necessarily the same as the signature date. If it really is effective 12/19/12, what is the plan's definition of "plan year"? Is there a short first plan year?