deferral deposits for shareholders

[thepensionmaven]

We have a SHNE 401(k) plan, 2 shareholders, 10 employees.  The clients is on extension every year and they contribute in September for the previous year.

The accounts are investment only with a major carrier.  The carrier has returned the elective deferrals of the shareholders telling them they have over-contributed for the year.

It has been my understanding that, as long as there is an election by the participant prior to the end of year, he has the ability to make the deferral contribution for the previous year.  Of course, this could be incorrect.

Does anyone have a cite??

[Bird]

You used the term "shareholders" which implies - well it means - that it is a corporation.  If so, then those shareholders should be getting wages and W-2s and their deferrals should be coming out of their wages.  If they are holding onto those deferrals and depositing them in Sept, then that is a different problem (late) than overcontributing.

If they are partners and not shareholders, then the contributions may be made as late as the due date of the tax return, and are deductible.  There are differing opinions on whether they are late for other purposes.  

Is this major carrier returning them without asking?  Without reporting?  When?  Are they being reported as current year or prior year deferrals when deposited?  There are many ways this can be screwed up; please try to provide more details.

[thepensionmaven]

This is a PLLC, and they are partners. 

Yes, There are too many ways to mess something like this up. 

The carrier is AXA, and yes, they are returning w/o asking.  When either the client calls or asks me to call, they tell us the client over-contributed to the salary deferral portion for the year.  Apparently they think that only one salary deferral maximum is allowed per year, but the client is always on accrual.  Everything seems to be recorded on a cash basis by AXA.

I can only assume the client is coding the contributions as current year, ie if the contribution is made in 2019, they are coding it as 2019; I keep telling them to code the prior year with a date of 12/31 of the year they are contributing for, not in.

Other than that, I think that would be the only problem?

[Bird]

There's still something missing.  Why would they think a single deposit in Sept is "too much" no matter which year it is coded for?

[thepensionmaven]

I would think, either:

1.  They don't know what they are doing, and shouldn't even be doing it, or

2.  They have been instructed that only one deposit equal to the max plus catch-up is allowed during the calendar year.

3.  Since contributions must be made online, the principal is not coding the contriubtion with a payroll date of 12/31 of the year they are making the deposit (and deduction) for.

[Bird]

Obviously some kind of misunderstanding/miscommunication about who does what and...everything.  For better or worse, it falls on you to figure it all out and straighten it out.

[Luke Bailey]

Assuming a calendar year taxable year, if the partner makes an irrevocable election by 12/31, he/she has made the deferral for the calendar year containing that 12/31. Treas. reg. 1.401(k)-1(b)(4)(iii)(B) and 1.401(k)-2(a)(4)(ii). The cash must then be contributed by the partnership by the tax return filing deadline of the partner, including extensions, in order to be deductible. IRC sec. 404(a)(6). Sometimes the partner has to write a check back to the partnership to make this happen, because he or she was overdistributed during the year in which the deferral election was made. Not a problem because any such overdistribution is a distribution of capital from partner's capital account, and the payback just replenishes the partner's capital account in accordance with partnership agreement. Happens all the time and is consistent with legal requirements. It's not like an employee-employer tax relationship.