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Individual 401(k)s Part 3

Anxiety Over Contribution Deadlines? How Late Is TOO LATE?

Deadline approaching

What is the deadline for making deferrals and contributions?

The deadline for making the “employer” contribution is the filing deadline (April 15th for sole proprietors and partners, March 15th for corporations and S-corporations). The deadline for making the elective deferral contributions are the end of the tax year for S-corporations and corporations, and April 15th for partnerships and sole proprietors.

Are there any plan reporting requirements?

It is not necessary to file a Form 5500 or Form 5500-EZ until the plan assets reach $250,000. However, once assets reach $250,000, a Form 5500 (or Form 5500-EZ) will need to be filed every year until the plan is terminated.

To see form 5500-EZ, please direct your web browser to the following address:

http://www.irs.gov/pub/irs-pdf/f5500ez.pdf

In addition to the plan level reporting, a Form 1099-R will need to be generated whenever a distribution is taken from the plan.

Form 1099-R is used for distributions from Pensions, Annuities, Retirement or Profit Sharing Plans, IRAs, etc. and is given to both the IRS and recipients or distributions from the plan during the year. It is used to report distribution (including rollovers) from a retirement plan.

To see Form 1099-R, please direct your web browser to the following address:

http://www.irs.gov/pub/irs-pdf/f1099r.pdf

What investments can a self-directed 401(k) hold?

A self-employed 401(k) may invest in a wide array of investments, but as with self-directed IRAs, these investment must be held by a trustee or custodian, and care must be taken to be sure the investments do not violate rules against “self-dealing”, also referred to as “prohibited transactions”.

Prohibited Transactions – Are they really serious?

According to Internal Revenue Code 4975, prohibited transactions are defined as follows:

(c) Prohibited transaction

(1) General rule

For purposes of this section, the term “prohibited transaction” means any direct or indirect

(A) sale or exchange, or leasing, of any property between a plan and a disqualified person;

(B) lending of money or other extension of credit between a plan and a disqualified person;

(C) furnishing of goods, services, or facilities between a plan and a disqualified person;

(D) transfer to, or use by or for the benefit of, a disqualified person of the income or assets of a plan;

(E) act by a disqualified person who is a fiduciary whereby he deals with the income or assets of a plan in his own interests or for his own account; or

(F) receipt of any consideration for his own personal account by any disqualified person who is a fiduciary from any party dealing with the plan in connection with a transaction involving the income or assets of the plan.

photo credit: Daniele Zanni via photopin cc