One of the more significant challenges facing 401(k) plan (and ERISA 403(b) plans) plan sponsors and practitioners is the timing issue regarding the depositing of elective deferrals into the trust. The DOL continues to strictly enforce the issue through its own investigations, Form 5500 questions answered under penalties of perjury, and making the issue a matter for private auditors to review. Despite the DOL’s emphasis on the issue over the past 10-15 years, practitioners continue to be confused as to application of the rule to partnerships (and LLCs taxed as partnerships); specifically, the partners. Unlike shareholder-employees of a corporation who receive paychecks in the same manner as their employees, partners do not receive paychecks like their employees (although, they often receive draws). In fact, partners generally do not know their earned income until a couple of months after the close of the tax year. The lack of regular paychecks and the timing of the determination of earned income often cause confusion regarding the application of the rules regarding the timing of the deposits for partners’ 401(k) plan deferrals. Practitioners often state that partners have until the deduction deadline (e.g. April 15^th) to deposit their elective deferrals. In this technical update, we will address the timing requirements for the depositing of partners 401(k) plan deferrals. 

What is the deadline for depositing elective deferrals? 

Elective deferrals become “plan assets” (and therefore, deposited in the plan trust) on the earlier of (1) as soon as the employer reasonably can segregate the elective deferrals from its general assets, or (2) the 15^th business day of the month following the month in which the employer otherwise would have paid the amounts in cash to the participant. DOL Reg. §2510.3-102(b). If the plan has fewer than 100 participants at the beginning of the plan year, the employer is deemed to satisfy the requirement to transmit the deferrals on the earliest date the employer reasonably can segregate the elective deferrals from its general assets if the employer deposits the deferrals not later than the 7^th business day following the day on which the employer receives the contribution or otherwise would have paid the amount in cash to the participant. DOL Reg. §2510.3-102(a)(2). 

Does the DOL provide a different deadline for partners? 

Effectively, no. The Preamble to the regulations indicates that it does not apply a different rule regarding the timing of deposits for elective deferrals to partners. However, the Preamble to the regulations does clarify that a partner’s elective deferrals become plan assets “at the earliest date they can reasonably be segregated from the partnership’s general assets after those monies would otherwise have been distributed to the partner (emphasis added), but no later than 15 business days after the month in which those monies would, but for the election, have been distributed to the partner.” Accordingly, the benchmark for determining when a partner’s elective deferrals need to be deposited is the date on which partner’s earned income is distributed. 

Example. X LLC has elected to be taxed as a partnership and its tax year is a calendar year. X also maintains a calendar year 401(k) plan. The partners have elected to defer various amounts of their earned income, as finally determined. The partnership’s accountant determines the partners’ distributive share of earned income on March 5, 2014. March 5^th is the benchmark date for purposes of applying the rule regarding the timing of depositing the partners’ elective deferrals. 

Example. Eve participates in the Y partnership 401(k) plan.  She receives a monthly draw of $10,000, paid on the last day of the month.  January 2, 2014, Eve signs a deferral election requesting the partnership to withhold $1,000 of each monthly draw and deposit it in the plan.  The last day of the month is the benchmark date for purposes of applying the rule on deposit timing. 

Comment: Practically, it would be difficult for the DOL to determine when the accountant determined the partners’ distributive share of earned income. Nevertheless, practitioners should be careful about communicating the correct rule to their clients.

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