Doctor's Catchup Contribution for 2015

[Pammie57]

We have a plan for a sole Prop. Doctor. He has filed an extension on his 1040 for 2015. He has not funded his own $6000 catch up contribution for 2015. Is it too late or does he have until he files his 1040? I can't remember - since I guess his income has not been determined for 2015. He did contribute regular deferrals during the year.

[Bill Presson]

It depends on what his deferral election that he signed prior to 12/31/15 (edited) says.

At this point the timing of the funding isn't the issue; it's whether he made the election timely.

WCP

[Mike Preston]

Bill means 12/31/2015.

[Pammie57]

Thanks!

[ETA Consulting LLC]

Now, you can provide the additional $6,000 in nonelective (which may result in having to provide additional non-elective contributions to other NHCEs). If his election was to defer only $18,000; then you'd normally need another $35K in employer contributions to get to his $53,000 limit. You can, instead, provide $41,000 in nonelective to get to his overall $59,000 limit (and make $6,000 of the $18,000 deferred become catchup). You'd, then, have to contend with a larger reduction to his "Earned Income" after the additional $6,000 in nonelective plus whatever else is provided to NHCEs in order to pass nondiscrmination.

Call me lame, but doesn't this get you pumped (at least a little) :-)

Good Luck!

[jpod]

Is he an unincorporated sole proprietor filing a Schedule C, without even an LLC disregarded entity? If so, while some may disagree, a 401k election prior to the end of the year in my opinion was unnecessary and would have been meaningless, and he can make his deferral contributions - catch-up or otherwise - at any time up to the extended due date of the 1040.

[Tom Poje]

Proving when a partner actually made an election, of course, might be hard to prove, but my understanding of the regs (beaten into my head [or body] a number of times), when it says you can't make the election after the last day of the tax year it means what it says.

(this is different than when the deferrals are actually made, it is the election that must be in place)


(iii) Timing of self-employed individual’s cash or deferred election. For purposes of
paragraph (a)(3)(iv) of this section, a partner’s compensation is deemed currently available on the last day of the partnership taxable year and a sole proprietor’s compensation is deemed currently available on the last day of the individual’s taxable year. Accordingly, a self-employed individual may not make a cash or deferred election with respect to compensation for a partnership or sole proprietorship taxable year after the last day of that year. See §1.401(k)-2(a)(4)(ii) for the rules regarding when these contributions are treated as allocated.

Treas. Reg. § 1.401(k)-1(a)(6)(iii)

at least one other group agrees (and I suspect they know more than I ever will)

The ERISA consultants at the Columbia Management Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs and qualified retirement plans. A recent call with a financial advisor in Nevada is representative of a common question relating to a 401(k) plan participant’s salary deferral election. The advisor asked:
“Several of my clients are self-employed and have 401(k) plans. What is the date by which a self-employed individual must make his or her salary deferral election?”
Highlights of Discussion
• Pursuant to Treas. Reg. §1.401(k)-1(a)(6)(iii), a self-employed individual (e.g., a sole proprietor or partner) must make his or her cash or deferred election no later than the last day of his or her tax year (e.g., by Dec. 31, 2014, for a 2014 calendar tax year). The timing is connected to when the individual’s compensation is “deemed currently available.”
• Often a self-employed individual’s actual compensation for the year is not determined until he or she completes his or her tax return, which could be after the end of the partnership or individual’s taxable year. The IRS deems a partner's compensation to be currently available on the last day of the partnership taxable year and a sole proprietor's compensation to be currently available on the last day of the individual's taxable year. Therefore, a self-employed individual may not make a cash or deferred election with respect to compensation for a partnership or sole proprietorship taxable year after the last day of that year.
• There are also special rules that address when salary deferrals for self-employed individuals are treated as made to the plan (versus when they may actually be made). Treas. Reg. §1.401(k)-2(a)(4)(ii) states that an elective contribution made on behalf of a partner or sole proprietor is treated as allocated to the individual’s plan account for the plan year that includes the last day of the partnership or sole proprietorship’s taxable year.
• From the Department of Labor’s perspective with respect to determining late deposits of employee deferrals, deferrals for self-employed individuals must be deposited as soon as they can be reasonably segregated from the business’s assets. The DOL’s safe harbor for plans with fewer than 100 employees also applies. Therefore, as long as the deferrals are transmitted within seven business days after the amounts became payable, the contributions are deemed timely made. From the IRS’ perspective, in no event can the deferrals be deposited after the deadline for filing the business’s tax return, plus extensions.
Conclusion
With respect to making a salary deferral election, the self-employed individual must do so no later than the last day of his or her tax year. Therefore, for those following a calendar tax year — be sure to execute those deferral elections by Dec. 31, 2014!
The Columbia Management Retirement Learning Center Resource Desk is staffed by the Retirement Learning Center, LLC, a third-party industry consultant that is not affiliated with Columbia Management. For informational purposes only. Please consult a tax advisor or attorney for specific tax or legal needs. © 2014 Columbia Management Investment Advisers, LLC. Used with permission.

http://www.napa-net.org/news/technical-competence/case-of-the-week-salary-deferral-elections-for-the-self-employed/

[jpod]

The election is made by the participant to have its employer withhold compensation and contribute it to the plan. In a partnership, that election is made by the partner to have the partnership withhold compensation. In the case of an unincorporated sole proprietor, it is impossible for the sole proprietor to make such an election because all money is all ready in his hands. So, ok, before the end of the year you write a note to yourself and stick it in a drawer. What policy goal does that achieve?

[Bill Presson]

Bill means 12/31/2015.

Whoops. Thanks and corrected.

[Belgarath]

"What policy goal does that achieve?"

I'm not saying this to be sarcastic at all, but I had the good fortune to have my initial mentor in this business, (more years ago than I care to say) tell me, "Don't try to make sense out of it! Just apply the rules, if there are any. If you try to make sense out of it, you'll make yourself crazy."

I thought that was good advice, and I've mostly followed it but I'm crazy anyway.

Regardless, I have no good answer for what policy goal this achieves, but thankfully for sleeping at night, I honestly don't care. I'm just thankful that the regulations now clearly spell out a rule, which I can show to recalcitrant clients and their advisors who don't believe me!

[QDROphile]

The same policy goal that requires certain contracts to be in writing to be valid.