Does my 401(k) contribution have to be done before year-end?

We get asked this question a lot. There’s a lot of misinformation on the topic. The answer depends on whether you have any employees (outside of owners and spouses).

First of all, there are two components to a 401k contribution: (1) the employee deferral; and (2) the profit sharing contribution. The elective deferral is the contribution that is made by employees to the plan. 

The common answer for the employee deferral is that it has to be done before December 31st or at least on the final payroll for the year (no later than Jan 15th). This is because the Department of Labor states that a company cannot withhold employee retirement funds and not timely remit them.

For non-owner employees, these must be elected by the end of the year and deposited into the employee’s retirement account within 7 business days (safe harbor rule) and no later than 15 days. There has been no debate on this issue.

But there has been debate for the owner/employees. These employee deferrals must be elected by the end of the year but can be contributed by the tax filing deadline (including extensions). This is because a solo 401k is a non-ERISA plan and fortunately not subject to the Department of Labor rules because it is just for owner-only businesses with no qualifying or eligible employees. For an S-Corp or C-Corp, the election is reflected on the W2 in box 12A, Code D.

There is no debate regarding the profit sharing contribution as it’s clear that it’s due before the tax return is filed (including extensions).

A good reference that supports this position is the IRS publication on retirement plans. There is a chart on page 3 found here: 2019 Publication 560 (irs.gov)