Can an employer pre-fund employer contributions

[spiritrider]

Another wonderful one-participant 401k situation, only this time aided and abetted by a CPA.

An S-Corp individual's CPA advised them to make a $10K employer contribution in January (like an IRA). This was on anticipated net business income (excluding wages and payroll taxes) of $40K. I don't know where the CPA expected the $10K for the employer contribution to come from.

When it became apparent that there would only be $30K in net business income, the CPA advised the individual to pay himself another $10K in wages. I have a hunch that there was no actual payroll just the filing of the appropriate Form 940/941 and their payments.

I believe if the individual properly loaned the $20K to the S-Corp. This would provide the $20K in basis to actually deduct the loss on the individuals Form 1040. Although, I have a hunch based on the overall fact pattern that similar to payroll situation, the $10K in employer contributions were not routed through the S-Corp's accounts and came from personal funds.

So back to the original question, would it be proper to make the entire year's employer contributions, before any compensation that contribution was based on, had been received.

What corrective action would/could be taken at this point in time. What would be the consequences, except for a well deserved smack upside the head of the CPA.

[Lou S.]

There is noting illegal about putting in employer contributions into the trust during the plan year. Assuming they were properly from the company to the plan.

But as you are finding out it's not always the best idea.

If he has $40K in wages the $10K PS contribution isn't a problem from the plan stand point.

If he has lass then $40K in wages a portion of the $10K PS contribution is a non-deductible contribution subject to an excise tax.

I'd let the CPA deal with any ramifications beyond that.

 

 

 

[Bill Presson]

Can any (all) of the $10k be considered a 401(k) deferral? Then I don't think you have any issues.

WCP

[spiritrider]

All of the $40K in W-2 wages have already been paid at this point without any employee deferrals.

[Bill Presson]

On 11/5/2017 at 9:20 PM, spiritrider said:

All of the $40K in W-2 wages have already been paid at this point without any employee deferrals.

If all this happened in 2017, to me it's very possible that the $10k was actually a deferral and the payroll just wasn't completed correctly. So, I don't see this as a plan issue, I see it as a payroll issue that needs to be corrected.

WCP

[spiritrider]

 

Additional information relevant to your solution.

The plan sponsor/participant of the one-participant 401k plan is also a participant in their primary W-2 employment 401k plan. The reason for the employer contribution to the one participant 401k was the intention, now reached of maximizing the employee deferral limit in their primary W-2 employment 401k plan.

Therefore, the employer contribution was the only option in the one-participant plan. I'm questioning the advice of the CPA to maximize the employer contribution before there was any compensation paid. It appears that the CPA has a solution (how valid I don't know) to the accounting and tax issues of the S-Corporations losses. The employer contribution was paid from personal funds.

What I am trying to determine is a problem/non-problem determination of the full year's maximum employer contribution before any paid compensation. If there is a problem, what would the corrective action be. Is there any guidance on any similar fact pattern.

[Bill Presson]

17 hours ago, spiritrider said:

 

What I am trying to determine is a problem/non-problem determination of the full year's maximum employer contribution before any paid compensation. If there is a problem, what would the corrective action be. Is there any guidance on any similar fact pattern.

I'm not particularly worried about the timing. There's nothing inherently wrong with making a deposit early. But you just have to pass all the tests at the end of the year and that's why we recommend not doing so. As of now, I still think it's a compensation issue. If it turns out there's not enough comp to support the deposit, then the document will explain what to do with a 415 excess contribution.

[spiritrider]

The compensation was increased to support the deposit. So I guess there is nothing to worry about.