SIMPLE 401(k) Plan Contributions for Self-Employed

[Guest Emiliano]

Self-Employed individual has two employees. When are the elective deferral contributions required to be deposited to the plan for the employees? And, more importantly, I would like to know when the elective deferral contribution(s) for the owner are required to be deposited to the plan.

[Bill Berke]

IRC Section 408(p)(5)(A) requires that elective deferrals must be deposited not later than the close of the 30-day period following the last day of the month in which the deferrals were made. But, I think if an employer routinely waits that long they will be in trouble. I'm not sure if SIMPLE plans come under Title I which would mean that the DOL rules would apply. But even if the plans are not covered by DOL, I would recommend following those rules.

The matching contribution may be deposited on the due date of the return (including extensions). I think you need to be careful to not confuse which type of contribution you are dealing with. The law does not distinguish between self-employed and common law employed

[Guest Emiliano]

For a self-employed individual, when is the deferral considered to have been made?

[Bill Berke]

Deferrals must be deposited during the calendar year. The tax problem is that no one can determine earned income until the last day of the year. So, theoretically one is guessing as to compensation for retirement purposes. But in my experience, most self-emplyed individuals can estimate income based upon prior experience. And this should not be a problem for self-employed person with a reasonable expectation of at least $6000 of earned income.

[Gary Lesser]

While earned income is deemed earned on the last day of the fiscal year, it is possible that it is not determined until a latter date. Thus, the elective amount, in the case of a self-employed individual, may be contributed after the end of the year. Also the 15 day rule for a SIMPLE IRA is NOT a safe harbor if segregation could occur earlier.

When the plan asset regulations were proposed, two comments were received by the DOL relating to when contributions by partners become plan assets. Those letters asserted that a partner's compensation is deemed currently available on the last day of the taxable year and that an individual partner must make an election by the last day of the year. In the view of the DOL, under the final regulations, the monies that are to go to a qualified 401(k) plan by virtue of a partner's election become plan assets at the earliest date they can reasonably be segregated from the partnership's general assets after those monies would otherwise have been distributed to the partner, but no later than 15 business days after the month in which those monies would, but for the election, have been distributed to the partner. [Emphasis added] [Preamble, ERISA § 2510.3-102]

It is unclear to what extent a sole proprietor could rely on those regulations. IF the DOLs comments are based on partnership taxation rules, then they might not apply to a sole proprietor (but, IMO, I think they would). The following example explains how this rule might apply in a typical situation.

Example. The Able-7 Partnership maintains a SARSEP. On December 31, 1999, the last day of its taxable and plan year, all the partners individually elect to defer the maximum amount into their SARSEP-IRAs (not to exceed $10,000 per person). During the year, each partner had a monthly draw of $2,000 cash against eventual earnings. The firm's accountant is ill and will not be able to compute Able-7's net earnings by the due date of Able-7's return and therefore files for an extension of behalf of the partnership and each of the partners. On June 27, the partnership is notified by its accountant that it indeed had a profit and that each of the partners is due an additional $37,000. Able-7 must deposit $70,000 as contributions to the SARSEP-IRAs of its seven partners as soon as the amounts can reasonably be segregated from the partnership's general assets, but no later than 15 business days after the end of the month of June. For deduction purposes, the amounts must be deposited by July 17, 2000, the extended due date of Able-7's 1999 return.