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Guest lskin
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Guest lskin

Employer runs a SEP on a calendar year and funds the SEP in 2006 for the calendar year 2005 .For which year is a person considered an active participant for IRA deductibility purposes, 2005 or 2006?

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Notice 87-16 is the main source of the detailed rules. The gist of it for DC seems to be whether or not the contribution was fixed in stone as of the end of 2005 (in our current example). As of 12/31/05, there was no matching required, there was no funding required, and no board resolution that specified a contribution (I believe such a resolution in our case would have resulted in a different answer; i.e. 2005). Check the notice; it gives an example.

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Guest lskin

I don't think I understand the last reply. Are we saying that with the example I gave at the beginning that they are for sure an active participant in 2006 and not 2005?

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I don't think I understand the last reply. Are we saying that with the example I gave at the beginning that they are for sure an active participant in 2006 and not 2005?

Yes, based on the facts given. When the year 2005 ended, it was still up to the employer's discretion as to whether there would be a contribution. I'm still unclear whether the answer would change if a written promise to contribute existed at the end of 2005, such as a Board of Directors resolution.

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  • 2 weeks later...

You must first establish whether the SEP is operated on a Calendar Year or Off-Calendar Year.

For the 2005 calendar year, there is a special rule stating that the participant is not active in 2005 in the event the contribution is totally discretionary and there was no way to know if a contribution would be made for that year. Hence, when funded in 2006 by the employer tax filing deadline (including extensions) the participant is considered active for 2006; even though the contributions were made with respect to compensation received during 2005.

For an off calendar plan year, the same principals would apply except that the plan year is now covering two taxable years of the participant. Let's assume that the plan year ends June 30th 2005 the employer tax return in on extension until February 15th 2006. Then any contribution made to the SEP would make the employee active in 2006 since this is when the contribution was funded.

NOW where you get kicked in the head.

Let's suppose than instead of making the contribution (for the PYE June 30, 2005) in 2006, it was funded on September 15th, 2005. In this case, the employee is considered as active for 2005. However, if a contribution for June 30th 2004 was actually funded during 2005; then that contribution funded on September 15th 2005 is now DEEMED to be made in 2006. Hence the individual is active for 2005 and 2006.

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  • 1 month later...

Generally, the discretionary contribution made in 2006 for 2005 makes the individual an active participant in 2006, and if a contribution is made for 2006 (ant any time), the individual is also treatede as an active participant the following year (2007).

Do you have any additional thoughts on why a BoD resolution would change the contribution from "discretionary" to "required" for active participation status? A BoD resolution does not necessary mean that the contribution must be made.

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Here's the Q&A-26 referred to earlier.

CB-NOTICE, PEN-RUL 17,100M, Notice 87-16, I.R.B. 1987-5.

A26: A profit sharing plan has a July 1 to June 30 plan year. Under the terms of the plan, employer contributions, if any, are made at the sole discretion of the Board of Directors. As of

June 30, 1987, no employee or employer contributions have been made and no amounts have been forfeited for the plan year ending June 30, 1987. Moreover, it is impossible to determine

whether a contribution will be made for the plan year ending on June 30, 1987. On January 15, 1988, the employer makes a contribution for the plan year ending on June 30, 1987. On

November 30, 1988, the employer makes a contribution for the plan year ending June 30, 1988.

On June 30, 1989 it is again impossible to determine whether a contribution will be made for the plan year ending on that date, and no contribution is made by December 31, 1989. Will a

participant in the plan described above be an active participant only for the 1988 taxable year?

A: No. In such a situation, when contributions to a discretionary defined contribution plan for two plan years are made in one calendar year, solely for the purposes of determining active

participant status, the contributions for the later plan year are deemed to be made in the next taxable year. In the fact pattern described above, the contribution made on November 30,

1988 is deemed to be made in taxable year 1989. Thus, the individual is an active participant in both the 1988 and 1989 taxable year.

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Guest lskin

I could see being an active participant in 2007 if a 2005 and 2006 contribution is made in 2006 but in this case only the 2005 contribution is being made in 2006. Do you still think they would be considered an active participant in 2007?

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I could see being an active participant in 2007 if a 2005 and 2006 contribution is made in 2006 but in this case only the 2005 contribution is being made in 2006. Do you still think they would be considered an active participant in 2007?

No. (Frankly, I'm not so sure that in a calendar year situation, if a 2005 contribution and a 2006 contribution are both made in 2006, that that makes one an active participant in 2007. I know the notice says "...when contributions to a discretionary defined contribution plan for two plan years are made in one calendar year, solely for the purposes of determining active participant status, the contributions for the later plan year are deemed to be made in the next taxable year" but I'm not sure that they didn't mean "two fiscal plan years." It's a pretty weird result if no contributions at all are made in 2007 and you're still an active participant. If true, I'm sure there is widespread noncompliance.)

I don't think a board resolution without an actual deposit during the year makes one an active participant.

Ed Snyder

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Employer runs a SEP on a calendar year and funds the SEP in 2006 for the calendar year 2005. For which year is a person considered an active participant for IRA deductibility purposes, 2005 or 2006?

Saabra: 2006

From IRS publication 590, P 11: Generally you are covered by a DC plan for a tax year if amounts are contributed or allocated to your account for the plan year that ends with or within the [your/employee's] tax year. Q -If the contribution for the employer's 2005 calendar plan year is made in 2006 why is the employee considered an active employee in 2006?

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MJB - see 1.219-2(d). There's a special rule for profit sharing plans. Given that a SEP contribution is completely discretionary, one would reasonably assume that the same treatment applies. Plus, of course, the IRS Notice 87-16. Excerpt below.

CB-NOTICE, PEN-RUL 17,100M, Notice 87-16, I.R.B. 1987-5.

A special rule applies to certain plans in which it is impossible to determine whether or not an amount (other than earnings) will be allocated to an individual's account for a given plan

year. If, with respect to a particular plan year, no amount attributable to forfeitures, employer contributions or employee contributions has been allocated to an individual's account by the

last day of the plan year, and contributions to the plan are purely discretionary for the plan year, such individual shall not be an active participant for the taxable year in which such plan

year ends. If, however, after the end of such plan year, the employer contributes an amount for such plan year, an individual to whose account an allocation is made shall be an active

participant for the taxable year in which the contribution is made.

Contributions shall be treated as purely discretionary for the plan year if, as of the end of the plan year, the employer is not obligated under the law or terms of the plan to make a

contribution for the plan year, and whether or not contributions are made to the plan is ultimately dependent upon the employer's decision or factors within the control of the employer.

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219-2(d)(2) provides a definitive rule for the timing of plan contribution when the contribution is allocated to the prior yr. The Notice only applies when it is impossible to determine the yr for which the allocation is made. If there is a designation by the employer of what yr the contribution applies, e.g., by checking the yes box in covered under an employer plan in the W-2 for the prior yr then the Notice will not apply.

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Here's the original qustion:

"Employer runs a SEP on a calendar year and funds the SEP in 2006 for the calendar year 2005 .For which year is a person considered an active participant for IRA deductibility purposes, 2005 or 2006?"

No other contributions whatsoever are mentioned or contemplated. In this situation, (d)(2) simply does not apply. (d)(1) is the applicable citation for this situation. And...87-16. I'm sorry, but we'll have to agree to disagree, as you'll never convince me it doesn't apply to this situation.

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B: I think the poster deserves a complete answer not just a response based on incomplete facts which he may not be aware of. You could not know if d2 does not apply and the answer given conflicts with what the IRS is telling taxpayers in P 12-13 of Pub 590 for 2005 which clearly states that the contribution would apply for the 05 yr. Also he repeated the Q of why the contribution cannot be allocated to 2005 and it is possible under the right facts in the regs for the contribution to be allocated to 2005. It is not a question of disagreeing on authorites but providing an complete answer to the Q.

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219-2(d)(2) provides a definitive rule for the timing of plan contribution when the contribution is allocated to the prior yr.

Actually, 1.219-2(d)(2) provides a special rule "...if such individual was an active participant in such previous year by reason of a prior contribution that was allocated as of a date in such previous year."

The original poster stated that that wasn't the case, so it's irrelevant.

The Notice only applies when it is impossible to determine the yr for which the allocation is made.

Not quite; from the notice: "A special rule applies to certain plans in which it is impossible to determine whether or not an amount (other than earnings) will be allocated to an individual's account for a given plan year." There's a difference.

If there is a designation by the employer of what yr the contribution applies, e.g., by checking the yes box in covered under an employer plan in the W-2 for the prior yr then the Notice will not apply.

Yikes; checking the "yes" box has anything to do with whether or not the "yes" box should be checked?!

I don't mean to be on the attack, but mis-paraphrasing citations is dangerous, and other non-savvy posters need to know.

Ed Snyder

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