employee deferral BEFORE plan adoption

[tpacpa]

Participant deferrals were withheld from a participant's paychecks (7/15/13 and 7/31/13) before the plan adoption date (8/15/13). The deferrals were never deposited into the plan, and (but) were not included in taxable wages on 2013 Form W-2. How to correct this? Possible options:

1) Correct the 2013 payroll information (W-2, quarterly, etc.) and reissue check. Of course, this would also involve the participant amending their 2013 Form 1040.

2) Deposit the two July 2013 deferrals into the plan, then distribute out of the plan with a Form 1099R. (If this is done, does the plan sponsor pay excise taxes on the late deferals?).

3) ????? (Never had this happen before, so I'm completely uncertain.)

[austin3515]

I don't like 2 at all because you know it's wrong (which is different than a client's honest mistake). 1 is obviously a nightmare but is also to me obviously the right thing to do. Maybe 3 is to issue them 1099's for the 401k? If you wanted to be really practical you could issue a 2014 1099 and then the exposure is only that it was taxed in the wrong year. Not sure how much money or how many people but if both are small option 3 would be looking a little bit better to me...

Option 4 might be to retroactively amend under EPCRS to change the effective date of the Plan to 7/1. I think you might be able to do this under SCP. You should check that out. You can definitely do this to retroactively change the entry dates on a uniform basis and this is very very close to the same thing.

[rcline46]

One very primary rule - deferrals cannot be made before the document is signed, even if there is a retroactive effective date.

[austin3515]

All I'm saying is maybe there is enough wiggle room under EPCRS. If it was me, I would look.

[K2retire]

If it is going to be corrected in 2014 how could it be taxable in 2013? Yes, that is when it should have been paid, but it wasn't. I would include it in the 2014 W-2 because that is when the pay was effectively available to the employees in question.

[masteff]

What if it was simply a payroll error? So they pay it on the next paycheck plus interest? The money was deducted prior to the plan effective date, so I think it technically was not a valid deferral, and the money never went into the plan.

[tpacpa]

I'll try and put it in a little more perspective. It was only $310, but it was a HCE. (There are only 3 employees/participants in the plan--owner/HCE, HCE, and non-HCE). So, it wasn't the owner, but still an HCE, and only $310. I know the amount is ultimately irrelevant, but still.

[austin3515]

If it is going to be corrected in 2014 how could it be taxable in 2013? Yes, that is when it should have been paid, but it wasn't. I would include it in the 2014 W-2 because that is when the pay was effectively available to the employees in question.

I really like this logic a lot especially for such a small amount. Just make sure you code the payment as exempt from FICA because the ee already paid the FICA (as did the employer).

[tpacpa]

I think I completely agree, and 2014 is certainly a much better solution for ALL involved. Thanks so much for all of your help!