SIRA contribution deadline
Does a business owner have until Oct 15th to make a salary deferral contribution to their own SIRA account, or does the 30 day requirement apply to a business owners salary deferral contribution as well?
Does a business owner have until Oct 15th to make a salary deferral contribution to their own SIRA account, or does the 30 day requirement apply to a business owners salary deferral contribution as well?
Permalink Submitted by Peter Lingane on Mon, 2011-01-31 16:11
The answer is found on p. 11 of Pub 560 “Time limits for contributing funds” to a SIMPLE IRA. Pub 560 can be downloaded from http://www.irs.gov.
Permalink Submitted by mk foss on Mon, 2011-01-31 18:06
I don’t think the answer is clear from the explanation at page 11 of Pub 560. All of the examples are for salaired people. A self-employed person’s ability to make and deduct contributions is based on Scheulde C income for the year. I don’t see a direct way to determine when the 30 day period begins under those circumstances.
Permalink Submitted by Peter Lingane on Tue, 2011-02-01 02:31
IRS Notice 98-4, Q&A G-5 says “The employer must make salary reduction contributions to … the SIMPLE IRA no later than the close of the 30-day period following the last day of the month in which amounts would otherwise have been payable to the employee in cash.” The subsequent comment concerning ERISA is not relevant to the self-employed.
The language in IRC 408(p)(5) is nearly identical.
This rule probably applies to the self-employed because Forms 5304/5-SIMPLE, albiet interpretations of the law, define “employee” to include self-employed individuals.
The payment date cannot be earlier than the date on which the amount of SE compensation is determined. Since it would generally be difficult to prove a determination date before the date when the business return is filed, my conclusion is that funding of SE salary reduction contributions must occur by the 30th day of the month after the month in which the business return is filed.
IRS Notice 98-4, Q&A G-6 says “Matching and nonelective employer contributions must be made … no later than the due date for filing the employer’s income tax return, including extensions … .” See also IRC 408(p)(5).
The instructions to Forms 5304/5-SIMPLE are slightly different: contributions are deductible if made for a particular tax year and if made before the due date, including extensions, of the business return for that year.
I conclude that the SE funding deadline is generally about a month after the filing of the tax return but that the IRS will deny the deduction if funding is not completed by October 15th, assuming a valid extension.
The IRS does not appear to have explicitly addressed the SE funding deadline. Frankly, there is no incentive to do so since late funding does not affect the amount of tax nor the date when the tax is due. A regulation limits early funding, before SE compensation is earned, and other regulations limit the SE employer’s discrimination opportunities by defining when SE compensation is earned and when the deferral election must be made.
I welcome corrections and criticisms.
Permalink Submitted by Martin Helmer on Tue, 2011-02-01 04:07
The safest route is to use a January 30 deadline for all SIMPLE Ira elective deferrals, including deferral amounts for the self employed. I do realize that the level of compensation may not have been determined by January 30. An unwieldy but otherwise practical solution is to make contributions at or in excess of the desired level and then remove the excess by the extended due date of the individual’s tax return.
Code section 408(p)(5) is pretty explicit in stating “the requirements of this paragraph are met”….if…..”an employer must make the elective employer contributions under paragraph 2(A)(i) not later than the close of the 30-day period following the last day of the month with repect to which the contributions are to be made…” Some SIMPLE Ira custodians will refuse to accept deferrals made after January 30.
So an administrative requirement to have a valid SIMPLE is to meet the 30 day limit. Yes, there’s compliance with the section 404 contribution deadline for deduction purposes, when contributions are made by the extended due date of the business return. But it’s clear the actual technical deadline is January 30.
Permalink Submitted by Dennis Prout on Tue, 2011-02-01 15:13
We were just informed that the client’s business is an S-corp. They are the only shareholder. Does this change the conversation? Again, they’re probably not going to know how much W-2 income they’re going to report until they have their taxes completed.
Permalink Submitted by Peter Lingane on Tue, 2011-02-01 17:28
The Code says that funding must occur “… following the last day of the month with respect to which the contributions are to be made …” whereas the Notice says “… following the last day of the month in which amounts would otherwise have been payable …” The Code generally trumps a Notice. Since it is almost certain that the SE contribution is made with respect to December [extrapolating Reg. 1.401(k)-2(a)(4) to the SIMPLE IRA], the SE funding deadline in January 30. I agree with martinhelmer.
The employee of an S-corp is not self-employed. Funding must occur monthly as wages are earned.