Owner of safe harbor plan underdeposited own 401(k)

[TPApril]

Safe harbor 401(k) Plan, 1owner, 5 staff. Discrepancy exists for 401(k) deposits only for owner back to 2014.

Owner ran payroll as if one amount was being deposited each time, but actual deposit made was less. Taxes were filed as if the larger amount was deposited.

(Example - W-2 showed $10,000 but 401k trust received $5,000)

Contemplating best means to correct - owner would like to make late deposits on own behalf, rather than refile personal/business taxes.

[ETA Consulting LLC]

We know the DOL's postion with respect to failing to timely separate amounts withheld from employees' pay from the company's assets. The problem here is that the employee is actually the owner. With that said, this isn't a situation where an employee need to be made whole; it's more of a situation where an owner received a tax deduction on amounts that were not contributed. The idea of providing a further upside in allowing him to treat this as a late deposit would appear to be more egregious than the first failure of not making the deposit.

I would imagine that you "could" actually correct as the late deposit and, at the same time, it does nothing to appease the IRS. The IRS has MANY arguments of why these amounts were not deductible 2014.

Just a few things to consider.

Good Luck!

[Belgarath]

Seems to me there are two issues. First, a failure to properly implement an election - assuming a proper deferral election was made. I think the fact that the "employee" in question is the owner is immaterial - an election was made, and not properly implemented, which is an operational error. This can be corrected under EPCRS - a portion of the under-withheld deferral (amount will depend upon specific dates) will need to be contributed as a "make-up" contribution, with interest. Second, taxes will need to be re-filed as the deduction taken was too large.

Fun for everyone.

[Bird]

You said "payroll" was run so I assume the business is a corporation. If so, the money was withheld and simply not deposited. I see no issue here other than a late deposit and would correct it accordingly.

If that's not the case and it is a self-employed individual, that's a little different. But maybe not...if I had a good election in place, I might be inclined to follow the election and treat this as a late deposit issue. But I'm not sure the IRS would agree.