The ERISA consultants at the Columbia Management Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs and qualified retirement plans. A recent call with a financial advisor in Nevada is representative of a common question relating to a 401(k) plan participant’s salary deferral election. The advisor asked:
“Several of my clients are self-employed and have 401(k) plans. What is the date by which a self-employed individual must make his or her salary deferral election?”
Highlights of Discussion
- Pursuant to Treas. Reg. §1.401(k)-1(a)(6)(iii), a self-employed individual (e.g., a sole proprietor or partner) must make his or her cash or deferred election no later than the last day of his or her tax year (e.g., by Dec. 31, 2014, for a 2014 calendar tax year). The timing is connected to when the individual’s compensation is “deemed currently available.”
- Often a self-employed individual’s actual compensation for the year is not determined until he or she completes his or her tax return, which could be after the end of the partnership or individual’s taxable year. The IRS deems a partner's compensation to be currently available on the last day of the partnership taxable year and a sole proprietor's compensation to be currently available on the last day of the individual's taxable year. Therefore, a self-employed individual may not make a cash or deferred election with respect to compensation for a partnership or sole proprietorship taxable year after the last day of that year.
- There are also special rules that address when salary deferrals for self-employed individuals are treated as made to the plan (versus when they may actually be made). Treas. Reg. §1.401(k)-2(a)(4)(ii) states that an elective contribution made on behalf of a partner or sole proprietor is treated as allocated to the individual’s plan account for the plan year that includes the last day of the partnership or sole proprietorship’s taxable year.
- From the Department of Labor’s perspective with respect to determining late deposits of employee deferrals, deferrals for self-employed individuals must be deposited as soon as they can be reasonably segregated from the business’s assets. The DOL’s safe harbor for plans with fewer than 100 employees also applies. Therefore, as long as the deferrals are transmitted within seven business days after the amounts became payable, the contributions are deemed timely made. From the IRS’ perspective, in no event can the deferrals be deposited after the deadline for filing the business’s tax return, plus extensions.
Conclusion
With respect to making a salary deferral election, the self-employed individual must do so no later than the last day of his or her tax year. Therefore, for those following a calendar tax year — be sure to execute those deferral elections by Dec. 31, 2014!
The Columbia Management Retirement Learning Center Resource Desk is staffed by the Retirement Learning Center, LLC, a third-party industry consultant that is not affiliated with Columbia Management. For informational purposes only. Please consult a tax advisor or attorney for specific tax or legal needs. © 2014 Columbia Management Investment Advisers, LLC. Used with permission.
