When is earned income deemed paid for safe harbor 401(k) purposes?

[Doghouse]

A plan is sponsored by a partnership of 75 partners. It is a safe harbor nonelective (3%) 401(k) with profit sharing.

A handful of partners are leaving the organization over the next few months. If their earned income is all deemed to be paid on the last day of the taxable year (12/31/16), then they would have no earned income while still "employed" by the partnership, and thus no safe harbor nonelective contribution for the year. Is that treatment correct, provided no plan provisions to the contrary?

I know this has been discussed previously, but I don't think I will be able to find it until BL offers a "Remedial Search 101" webinar.

[Lou S.]

It sounds like you are trying to institute a last day requirement for partners to receive a safe harbor contribution. I don't think your logic will fly with the IRS but I could be wrong.

[Doghouse]

No, Lou, I'm not trying to do that. I'm just trying to nail down when income is actually paid - in this case, whether it is considered "paid" prior to the time it becomes "fixed" (December 31).

[Lou S.]

Yeah it it is always an interesting question with self employed. I think in 415 compensation definitions it is almost certain that the pay would qualify as 415 compensation. Even though it is "fixed on 12/31" I don't see any reasonable way of classifying it as anything other than pay earned while in the employ of the employer.