SE-401K mid-year opening?


A

aloy.parker

Re. new SE-401K account for a single-person LLC with no other employees (which is treated as a Schedule C business) where a separate bank account is maintained, where no compensation other than expense reimbursements was disbursed from LLC account to the owner.

If the SE-401K plan is setup on, e.g., on 12/1/2012 and nothing is backdated (including the annual salary reduction form ), is there any IRS requirement to compute the exact Schedule C profit at the creation date so that either the max deferral (e.g. 17K for 2012) or the profit sharing amount (25%) is only based on the net income from 12/1 -12/31??

The instructions from Fidelity say "... compensation means earned income." and "... Under no circumstances may a salary deferral election apply to compensation you have already received", but if no funds from the LLC are used/disbursed for personal use, do they really mean you need to compute your Schedule C profit on the specific date to adjust the max contribution amounts?

Also, on another page Fidelity has a "TIP" in that they say to back date the forms to Jan 1 so you can contribute the max? Is this needed?


E.g. worst case example, LLC received various incoming payments throughout the year, pays office rent, travel expenses, pays several contractors, buys depreciable items, etc (no payments to owner). Plan is setup 12/1, owner goes on vacation for December (no more accounts payable received). Can any SE-401K deferral/salary reduction or profit component (25%) be put in the 401K for 2012 if he starts the plan on 12/1 and elects 100% of compensation be deferred on his salary reduction form?
 
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M

Mark Bole

Re. new SE-401K account for a single-person LLC with no other
employees (which is treated as a Schedule C business) where a
separate bank account is maintained, where no compensation other than
expense reimbursements was disbursed from LLC account to the owner.
Disbursements to or withdrawals by a Schedule C owner are not the same
thing as compensation.

If the SE-401K plan is setup on, e.g., on 12/1/2012 and nothing is
backdated (including the annual salary reduction form ), is there any
IRS requirement to compute the exact Schedule C profit at the
creation date so that either the max deferral (e.g. 17K for 2012) or
the profit sharing amount (25%) is only based on the net income from
12/1 -12/31??
No, to the best of my knowledge. In fact, I may be in the minority by
thinking that the salary deferral contribution for the year has to be
made by 12/31, as opposed to 4/15 for the profit-sharing contribution.
In previous discussions of this issue, it has been mentioned by some
that even the salary deferral portion can be made after year-end.


[...]
Can any SE-401K deferral/salary reduction or
profit component (25%) be put in the 401K for 2012 if he starts the
plan on 12/1 and elects 100% of compensation be deferred on his
salary reduction form?
Yes...assuming you know how the salary deferral and profit-sharing
component limits are calculated, many tax software programs have a
worksheet for this, as does Fidelity, T.Rowe Price, etc.
 
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T

Thunderbird

Re.  new SE-401K account for a single-person LLC with no other
employees (which is treated as a Schedule C business) where a
separate bank account is maintained, where no compensation other than
expense reimbursements was disbursed from LLC account to the owner.
Disbursements to or withdrawals by a Schedule C owner are not the same
thing as compensation.
If the SE-401K plan is setup on, e.g., on 12/1/2012 and nothing is
backdated (including the annual salary reduction form ), is there any
IRS requirement to compute the exact Schedule C profit at the
creation date so that either the max deferral (e.g. 17K for 2012) or
the profit sharing amount (25%) is only based on the net income from
12/1 -12/31??
No, to the best of my knowledge.  In fact, I may be in the minority by
thinking that the salary deferral contribution for the year has to be
made by 12/31, as opposed to 4/15 for the profit-sharing contribution.
In previous discussions of this issue, it has been mentioned by some
that even the salary deferral portion can be made after year-end.

[...]
 Can any SE-401K deferral/salary reduction  or
profit component (25%) be put in the 401K for 2012 if he starts the
plan on 12/1 and elects 100% of compensation be deferred on his
salary reduction form?
Yes...assuming you know how the salary deferral and profit-sharing
component limits are calculated, many tax software programs have a
worksheet for this, as does Fidelity, T.Rowe Price, etc.
Mark, thanks for the response.
Sorry about the overly-long question.
But, my core question was (for you and other commentors) is, for a NEW
plan, whether you are required to use only profit AFTER the plan-start-
date and/or when the salary deferal/reduction form is signed as the
basis for any contributions (not the full-year profit), not when you
need to make the contributions (which I agree is April 15 for a single-
owner/employee plan).
I believe your response to this specific question is, "No. to the best
of my knowledge".
 

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