To true-up or not to true-up... that is the question.

Situation - Company has a safe harbor match 401k plan.  The owner is self-employed, Schedule C.  He has several employees who will defer on a payroll by payroll basis, and he would like to fund safe harbor match is contributed each pay period, and not provide a true up, as that's how his other employer, where he is just a W2 employee, operates.  We won't be "paid" via payroll on the business in question, his income would be determined via his schedule C after the year in over.  Once he knows his income figure (after year-end), he would like to contribute to the plan based on his Schedule C, self employed income, and deposit his deferrals and the appropriate match after year-end.  Is there a way to structure this?  If the determination period is "End of Plan Year", then he'd certainly be able to participate as he wants, but would also be required to provide everyone with a true-up.  If the doc's determination period is "Each Pay Period" that does not allow for true ups, but would that negate his ability to participate since he's technically not participating on a payroll by payroll basis?  Would he technically be providing himself a true-up but not everyone else?  Thoughts?

1. Assuming he's not making deposits based on draws through the year and only deposits once, that really is his only pay period.

2. With that said, I really don't like when employers don't do a true up and I would highly encourage him (if he was my client) to do a true up. The employer needs to have budgeted the full match anyway and an employee shouldn't be harmed if they have to structure the timing of the deferrals differently through the year.

As I understand it his comp is "earned" on 12/31 and his "payroll period" for lack of a better term is the plan year, so his "per payroll" match would be the same as and annual match and not technically a true up..

Thank you both.  I think I agree with both of you.  He can do it, but I don't really like it either.

Under the 401(k) regs, a sole proprietor’s compensation is not currently available until the last day of the individual’s taxable year.

I assume that there is no limit on how much salary deferrals are matched.  (If there isn't, it makes me wonder why a true-up is necessary ...)  If there is and you do a payroll period match, the owner's deferrals to be matched will be subject to the limit.  E.g., if the plan said that it matches deferrals up to 6% of pay, only 6% of that one payroll period for the owner can be matched.  If that is not enough to get him the match he wants, then it's a problem.

If you need to use a "true-up" technique to get the owner what he wants, then it needs to be nondiscriminatory.  You can't have a "no true-up except for the only person who is self-employed, who does get a true-up" provision.

If the sole proprietor gets a match based on a draw and the match is limited to 6% of pay, then come year end when net earnings from self-employment is determined and sole proprietor's compensation is higher, then does the sole proprietor get a match on 6% of the additional net earnings from self-employment over and above the sum of the draws?

If the net earnings from self-employment is significantly lower so that the sum of the matches on the draws exceeds 6% of the final net earnings from self-employment, then is this treated as an excess match contribution?

Yes and Yes.  For self-employment, deferral deposits are allowed throughout the year on a performed service basis; but the end of year, total year basis determination of compensation is applied for all other purposes.