Partnership with fiscal year 4/30 sponsors a calendar year 401(k)

[Guest AlCal]

Partnership sponsors a calendar year 401(k).

The partnership is on a 4/30/2000 fiscal year( just found out this is possible) and filed for extension until 02/15/2001

Deferrals for non parteners participants were made on a payroll basis during the 2000 plan year.

Parteners want to deposit their deferals for the PYE 12/31/2000 in February 2001. They did that in previous years and was told by previous TPA that is OK. Their argument is that they don't know the partnership profit until just before the extension deadline.

Any comments re the legitimacy of above situation greatly appreciated.

[rcline46]

You are working with several items:

1. 402(g) limit of $10,500 on a calendar year basis

2. Definition of partnership income

3. Deposit of partners deferrals

1. Easy, as long as you know what calendar year the deposits are in respect of.

2. This is easy, the partners income, like that of a sole prop, is defined as earned on the last of the partnership year. Therefore the income is defined as being earned on 4/30 even if not determined until later. This also means that the deferral rates must be in place no later than 4/29. The partners CANNOT decide what to put in AFTER 4/29. Even if their income is not known until much later.

3. Once the income is finally known, Say next Jan 31, they must follow the regular ASAP deposit rules, and the deferral is in respect of previous year.

If they are following the deferral election rules, then this is just fine.

[Guest xplan]

Assuming the partners are all calendar year tax payers, the distributive share of the partnership income for the fiscal year ending 4/30/00 would be 2000 income for the partners (IRC 706(a)). As such, they would be able to deposit their 12/31/00 deferral amounts in February 2001. Contributions made on behalf of a partner are allocated solely to that partner. They are not considered business expenses, like the common law employee contributions, but are considered individual income adjustments (page 1 to the 1040). Since the partnership income is considered 2000 income to the partners, they can deposit their deferrals for 12/31/00 up to the due date for filing their 2000 tax return, including extensions. This is very confusing and highly uncommon, but it seems as if the partnership filed a Form 8716 and was allowed to use a tax year different than its "majority interest tax year."

You just have to keep in mind that the timing of the contributions and deductibility depends on the tax year of the partners in this situation. The income from the partnership will, for the most part, be a 2000 tax item for the partners. Therefore, as long as they made their withholding election prior to the end of the parnterships fiscal year, the K-1 to Form 1065 will reflect the proper amounts they can take as a 2000 individual tax adjustment.

[M R Bernardin]

Just one clarification. The 402(g) limit is for the partner's taxable year, which may not be the calendar year if the partnership tax year is a fiscal year. You might want to look at Notice 87-13 and the 401(k) (or 402(g)?) regs.