In Order for employer contributions to qualified plans to be deductible, they must be deposited by the employer’s federal tax return due date according to Internal Revenue Code section 404(a)(6).

If the tax return is extended, the taxpayer is given additional time to deposit the employer’s contribution. This rule applies to both cash and accrual basis taxpayers. Employer contributions are defined as profit sharing, money purchase, defined benefit and matching contributions.

For example, a calendar year C or S corporation that sponsors a 401(k) profit sharing plan, which offers both profit sharing and matching contributions. The 2001 corporate tax return (1120 or 1120S) is due by March 15, 2002. Profit sharing and matching contributions must be deposited by March 15, 2002 in order to be deductible, regardless of whether the taxpayer is under the cash or accrual basis of accounting.

If the corporate tax return is extended before March 15, 2002 using form 7004, the corporation has until September 15, 2002 to deposit the 2001 profit sharing and matching contributions. These dates would also apply for defined benefit and money purchase contributions.

Sole proprietors are unincorporated businesses. They are normally calendar year taxpayers and file form 1040 and report their business activity on schedule C.

Calendar year 2001 1040s are due by April 15, 2002. For Employer contributions to be deductible, they must be deposited by April 15, 2002. The sole proprietor’s tax return can be extended for four months to August 15, 2002 by completing form 4868, and another two months to October 15, 2002 by completing form 2668. If the return is extended, the date by which the employer’s contribution must be deposited is also extended.

Note that even if both extensions are filed and granted, money purchase and defined benefit contributions must be deposited by September 15, 2002 due to minimum funding requirements.

Employer contributions are considered deposited if they are mailed by the due date of the taxpayer’s tax return.

401(k) contributions which an employer withholds from employees must be deposited as soon as administratively feasible, but no later than the 15th day of the following month. 401(k) contributions deposited after the 15th day of the following month are subject to a fifteen percent IRS penalty. The employer is also required to make up any lost earnings to the participants. Go to our website at http://pages.prodigy.net/ars_inc to review the article in the Volume 2, Issue 2-April 2001 newsletter which has more details.

Contact Administrative Retirement Services, Inc. if you have any questions.

©2002 Administrative Retirement Services, Inc.

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