401(k) catch up contributions

A: This is a tricky issue only because of the way that many self-employed people handle their accounting and the lax manner in which many smaller businesses handle their 401(k) plan filings. Assuming that both your business and personal tax year is the calendar year and that your final pay or bonus is decided in 2006 after the year-end accounting is complete, then it would be possible to defer all or part of your year-end bonus toward 2005 elective deferrals provided that your plan document provided for this election. Note that most small business 401(k) plans have not yet been modified to allow for "catch-up" contributions, so this is a moot point. If your plan has not been modified to allow catch-up contributions, first replace your plan documents first and then make the catch up contributions going forward from that date. 

 It is common for some self-employed people to have no payroll transactions until after the close of the year. The common thinking is "how can I decide what I can defer to a retirement plan until I know how much I earned?" In this case it is permissible to make the 401(k) plan contribution at the same time as final salary transactions, even if after the end of the plan year. On the other hand, the IRS is clear that elective salary deferral contributions to a 401(k) cannot be made on a retroactive basis.