Establishing a Individual 401k
I have a client who wants to set up an I401k. He may not be able to get the paperwork back to me today to get it set up for 2021. The custodian said from an Operations standpoint, they will set up the account when I send in the paperwork.
My client wants to establish an account and make a contribution for 2021. The custodian always codes the contribution in the year it was received and leaves it up to the client’s accountant to code it for a prior year
– If the I401k is established next week, can he still fund it and have it count for 2022?
– I assume he can contribute his newly established I401k all the way up to the tax filing deadline?
Permalink Submitted by William Tuttle on Fri, 2021-12-31 15:35
Prior to the 2020 tax year, the deadline to adopt a 401k was 12/31.
Beginning with the 2020 tax year, a one-participant 401k can be adopted and employer contributions made up until the employers tax filing deadline including extensions.
However, the legislation enabling the later deadline did not change the requirement that a self-employed employee deferral election must be completed by 12/31 or that an S-Corp 2% shareholder-employee’s employee deferral must come from compensation not already received with a pay date on or before 12/31.
Bottom line: If a one-participant 401k is not adopted by 12/31, neither a self-employed individual nor an S-Corp 2% shareholder-employee can make employee deferrals for that tax year.
Permalink Submitted by David Mertz on Fri, 2021-12-31 15:41
If the plan is not established until after the end of 2021, he’ll be able to make an employer profit sharing contribution for 2021 but not an employee elective deferral. The election to make an employee deferral for 2021 must be made by the end of 2021 and if the plan is not established by the end of 2021, that election can’t be made; an election for deferral cannot be made to a 401(k) that does not yet exist. He’ll have until the due date of his tax return to make the employer contribution.
Permalink Submitted by Robert Roselli on Fri, 2021-12-31 17:42
A phenomenal explanation. Happy New Year to everyone at Ed Slott.
Permalink Submitted by Robert Roselli on Tue, 2022-02-08 14:12
Hi, I received this guidance on 12/31/21. The plan didn’t get estalbished until 01/05/2002. My client’s accountant sent me Publication 560, where it does state the plan must be established by the end of the tax year. What ruling allows employer contributions? From this publication, it almost appears no contributions can be made.
Permalink Submitted by David Mertz on Tue, 2022-02-08 22:12
Pub 560 is technically correct even though the employer has until the due date of the tax return to adopt the plan. Sec. 201 of the SECURE Act added to the tax code section 401(b)(2) which says, “If an employer adopts a stock bonus, pension, profit-sharing, or annuity plan after the close of a taxable year but before the time prescribed by law for filing the return of the employer for the taxable year (including extensions thereof), the employer may elect to treat the plan as having been adopted as of the last day of the taxable year.” Such a plan can be treated as having been adopted on December 31, satisfying the deadline stated in Pub 560.
Permalink Submitted by Robert Roselli on Wed, 2022-02-09 17:55
For the information. In my case, it’s an Individual 401K. The rule states only for qualified plans that are employer funded such as profit sharing and cash balance pension. Those plans are employer-funded only. In the case of the I401k, it’s both employee and employer-funded. This seems to fall into a grey area. Where it’s both, would the IRS allow the ER contribution only? If not, can we consider a SEP?It definitely mentions you can’t make 401k contributions. Most of it is cut and dry except the employer contribution part of the I401K. So I am looking for guidance if it’s ok to go ahead with the ER contribution or a SEP? Thanks so much