The Owner Who Wants a Retroactive Fix
A 62-year-old sole proprietor sponsors a one-participant 401(k) plan with a calendar plan year. In March he discovers that for the prior plan year he deferred $18,000 from his S-corp wages and also made a $10,000 employer profit-sharing contribution, but his CPA now says the profit-sharing deposit was actually made from the wrong bank account and was not funded until 14 months after the plan year ended. His total prior-year compensation was $95,000. He asks you to 'just backdate the paperwork' so the deposit looks timely, noting the plan document gives the employer until the tax-filing deadline plus extensions to fund the contribution. He also wants to know whether he can simply recharacterize the late profit-sharing amount as an additional deferral to avoid any correction.
1. Identify the compliance issue with the late profit-sharing deposit and explain whether the tax-filing-deadline rule rescues the employer here.
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The tax-filing-deadline-plus-extensions window applies to employer contributions deducted for the prior tax year - it is a deduction-timing rule, not a free pass on the plan's own funding obligation. The deposit landed 14 months after the plan year ended, which is beyond that window for a calendar-year plan whose return was due the following spring.
More importantly, backdating the paperwork is not a correction - it is falsification. The correct path is a formal correction of an operational failure (a late deposit of an employer contribution). The employer should:
- Determine the missed deposit date and quantify lost earnings.
- Use an IRS-approved correction method (self-correction if eligible, otherwise VCP) to make the plan whole.
- Document the failure, the correction, and the earnings calculation in plan records.
The client should be told plainly that no one on the engagement will create documents that misstate when money moved.
2. The client proposes recharacterizing the late profit-sharing amount as employee deferrals. Evaluate this idea against the applicable limits and the nature of the contribution.
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Recharacterization fails on multiple grounds:
- Source is wrong. A profit-sharing contribution is an employer contribution. Deferrals must come from the participant's compensation via a payroll election. You cannot relabel employer money as an elective deferral after the fact.
- Election timing. Deferrals require a prospective salary-reduction election. There is no valid election for the prior year to support a new deferral now.
- Limits. At $95,000 of compensation, the prior-year 402(g) deferral limit (assuming the standard limit in effect) is well below $18,000 + $10,000 = $28,000. Even if the mechanics worked, the combined amount would exceed the deferral limit.
- 415(c) annual additions. Deferrals plus employer contributions are capped at the lesser of the dollar limit or 100% of compensation. The combined $28,000 is under the compensation cap, but the point is that relabeling does not cure the late-deposit failure.
The proper answer: correct the late employer contribution with earnings, and separately confirm the deferrals were properly elected and timely deposited.