401k Contribution Deadline for Small Business Owners

admin — Thu, 01 Apr 2010 15:16:04 +0000

When the Department of Labor (DOL) has jurisdictional authority over a 401(k) plan, salary deferrals should be separated from the employer’s assets and deposited in trust as soon as administratively feasible. For plans with fewer than 100 participants, the DOL has proposed a safe harbor deposit deadline of seven days from the date of deferral. A failure to deposit deferrals on a timely basis is considered a prohibited transaction subject to disclosure and penalty.

The DOL has jurisdictional authority over a 401(k) plan if the plan covers an ‘employee’. Generally, all employees who work at least 1,000 hours per year will be covered employees. However, in defining the word ‘employee’, [quoting from the regulations] “(1) an individual and his or her spouse shall not be deemed to be employees with respect to a trade or business, whether incorporated or unincorporated, which is wholly owned by the individual or by the individual and his or her spouse, and (2) a partner in a partnership and his or her spouse shall not be deemed to be employees with respect to the partnership.”

Thus, for plans covering only business owners, the DOL does not have jurisdictional authority; and therefore, its prohibited transaction rules do not apply. For this reason, an alternative deadline for depositing 401(k) deferrals may be used by such plans.

This deadline is the due date for filing the income tax return for the business that adopted the 401(k) plan. If the deferral is not deposited by the due date of the income tax return, it may not be claimed as a deduction on that tax return.

Stephen Kimball, CPA

Section 529 Plans

admin — Wed, 10 Mar 2010 15:21:26 +0000

Since my nieces have a household of toys and their mother dresses them differently than I would, I generally write checks for Christmas and birthday gifts. This year, I am going to begin funding 529 plans for the girls. A Section 529 plan allows an individual to put money into an account for a named beneficiary for educational purposes. Unlike a Coverdell IRA, there are no income restrictions as to who can contribute. Any one can contribute to the account. Almost every state offers 529 plans and some offer more than one. You can invest in any states’ plan and there may be tax benefits to investing in your state’s plan. Arizona offers a subtraction of up to $750 (individual)/$1,500 (joint) for contributions made between 2008 and 2012 on its tax return. The beneficiary does not have to attend school in the same state as the 529 plan you choose. What is so great about them is the money in the account grows tax free and the earnings can be withdrawn tax free so as long as they are used for “higher education expenses” i.e., tuition, fees, books, room and board, supplies. Funds not used for qualified education are subject to income tax and a 10% penalty. The funds can remain in your control and not the beneficiary’s. If a child does not go to college, the account owner can change the beneficiary and rollover the account to someone else that wants to go to college.

Section 529 plans present gifting opportunities. You can make annual exclusion gifts to an account of $13,000 (individual)/ $26,000 (joint). Alternatively, you can frontload five years worth of gifts up to $65,000 (individual)/$130,000 (joint) in year 1 and those gifts will qualify as annual exclusion gifts in years two through five.

Granted, to a child, these are boring and unmemorable gifts. However, they are a great way to save for the rising cost of college education.

Jennie Ward

Tax Insights » contributions

401k Contribution Deadline for Small Business Owners

Section 529 Plans