Can a 401(k) plan and deferral election forms have retroactive effecti

[Guest Bud]

Company intended to start a 401(k) plan on 1/1/00. It got around to signing the plan document on 2/15/00. Election forms were distributed to eligible employees on 1/17 and all employees enrolled by 1/31. The first deposit into the 401(k) plan was on 2/15 and it supposedly consisted of deductions from 1/1 to 1/31.

The deferrals for January seem wrong because the plan document was not executed at the time that that compensation was earned. Some of the January deferrals seem wrong too because they were retroactive to the beginning of the month on compensation that was earned before an election form was signed. Isn’t that wrong?! What Code or regulation sections were violated?

[Guest Do]

I don't think the salary deferrals are proper and the "true" effective date of the plan is February 15. Salary deferrals have to be withheld pursuant to a cash or deferred arrangement that is part of a profit sharing plan. If the plan did not exist, then the deferrals were not pursuant to a CODA.

With respect to your other question, the salary deferrals on compensation that had already been earned, but not paid (because the paycheck had not been cut yet) would be not be proper salary deferrals. An election has to be made before the money is earned, otherwise it's taxable under the economic benefit doctrine.

That's my two cents; I'm curious to hear others. If I'm wrong, I'd like to know.

[KIP KRAUS]

I guess I’m a little more liberal than Do in that I would look at the intent of the company. If the company executed a board resolution prior to 1/1 stating that they were going to institute a 401(k) plan effective 1/1/00 I don’t think that the date they actually signed the plan document would matter, especially if the plan document clearly states that the plan effective date is 1/1/00. On the other hand, I agree that applications to defer to the plan cannot be made retroactive to 1/1.

That’s my opinion and not based on any reg. Sites, but I think it makes since. Maybe there are some sited opinions that someone out there can provide.

[KJohnson]

The reg states that a cash or deferred election "can only be made with respect to amounts that would (but for the cash or deferred election) become currently available after the later of the date when the employer adopts the cash or deferred arrangement or the date on whch the arrangement first becomes effective." Therefore, unless employees would not have been paid for January until after the employer signed the document on 2/15 I think you have a problem.

My recollection is that the IRS's position is that corporate minutes aren't sufficient to "adopt" the arrangement and that this position has been upheld by the Courts although I don't have a cite handy.

I do think that if, for example, an employee is paid on February 15 for all of January wages that the employee could make a deferral election on February 14 for the month of January because those January wages had not yet become "currently available" tot he employee.