accrual of elective deferral

We were just notified by a brokerage firm that our client, sole shareholder of his PC apparently over contributed to the employee portion of the plan.

When reviewing the contribution history from 1/1/2017 - 12/31/2017, it would appear as though the balance of his elective contribution was for the prior year.

He is not eligible to make catch-ups.

I know that sole proprietors have until the due date of the business tax return including extension to contribute to the plan, including any employe contributions, but I do not think that applies to shareholders?

It's kind of confusing but I think you are saying that the 2017 deposits exceeded $18,000, but some of that was really for 2016?

It's not at all unusual for deposits to cross years, so I don't see it as a big deal at first blush.  If the contributions were in fact withheld from his pay in 2016 then they must be deposited (lateness being another issue).  Could just be that someone "coded" them with the wrong year.  Or it could be that it's a total mess, with the guy just throwing money in and backtracking to try to make things work out.

This is a poster child for 1) brokerage firms sticking to handling investments and not trying to keep track of contributions by year, and 2) having someone knowledgeable "run" every plan, no matter how small.  This question doesn't come up if someone does a 2016 val, compares withholding to deposits, and reconciles assets.

Your statement of facts is very confusing, but your last paragraph asks a simple question.

No, a shareholder does NOT have any special rules for deferrals. Deferrals come from W-2 income and must come out of checks issued during the calendar year to count for that calendar year.

In addition, your statement about sole prop having until the due date of their return to make their deferral is factually incorrect. While they have a little more flexibility, it is very limited.  The deferral election must be actively made prior to the year end and the contribution must be made at the earliest date where it is determined what the earned income is.  If the accountant gets all the work done by January 15 for the prior year and the election was made for $18k, that money better be in long before the end of January.

We simply have all our self-employed (sole props and partners) put their full deferral in by 12/31s so as not to have to deal with this slippery slope and having it challenged by IRS 2 or 3 years after all the annual plan admin is done.  Just think of the complexities of having to fix it retroactively because the IRS doesn't allow a contribution of a prior year deferral on the extended due date of the return of 10/15!

14 hours ago, Larry Starr said:

We simply have all our self-employed (sole props and partners) put their full deferral in by 12/31s so as not to have to deal with this slippery slope and having it challenged by IRS 2 or 3 years after all the annual plan admin is done.  Just think of the complexities of having to fix it retroactively because the IRS doesn't allow a contribution of a prior year deferral on the extended due date of the return of 10/15!

 

That works well until they year that they have a loss!

Then they just get the money refunded.  It's like an $18,000 bonus the next year!

Actually, finally, per accountant, ADP did not cap him at the $18K so he contriubted too much in 2017, elective contribution, so there is no way to credit excess to 2018

Therefore, he gets a 1099R for excess contribution as well as earnings on excess, problem solved.

Thanks all.

On 4/5/2018 at 9:56 AM, K2retire said:

That works well until they year that they have a loss!

You are correct; it is a rare client who ever has a loss, but it happens.  If it is a client where that is a possibility, we suggest they wait until December to make their deferral with the hope that they know that they will show a profit.  And if they don't, then the contribution was a mistake of fact and can be withdrawn under those rules.

Apparently the payroll people did not cut him off at  $18,000 in the calendar year so the excess must be refunded?