Publications

March 1998

Matching Contributions of Self-Employed No Longer Treated As Elective Deferral In 401(k) Plans

By J. Michael Bermensolo, Geller Group Ltd.

The Taxpayer Relief Act of 1997 (TRA '97), which the President signed into law on August 5, 1997, reconciles the treatment of matching contributions made to IRC section 401(k) plans for self-employed individuals (sole proprietors and partners) with the treatment provided to employees under such plans. Accordingly, effective for plan years beginning after December 31, 1997, matching contributions made for self-employed individuals under a section 401(k) plan are not subject to the limit ($9,500 in 1997 and $10,000 in 1998) on elective salary deferrals.

Prior to the 1998 plan year, under Treasury regulations, if a deduction for a partnership matching contribution was allocated to the partner for whom it was made, the matching contribution was treated as an elective salary deferral contribution for the partner. Because the regulations required that a partnership allocate the deduction for all contributions to a 401(k) plan on behalf of a partner to that partner, it was, in effect, nearly impossible for a partnership to make matching contributions for its partners or for a sole proprietorship to make such a contribution for him- or herself.

Thus, effective with the first day of a 1998 plan year, partners and sole proprietors will be able to maximize their elective salary deferral contributions and be eligible for an allocation of an employer matching contribution like any employee. Now, such contributions are only limited by the nondiscrimination tests applicable to such plans.