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Employer's Profit Share plan cause IRA to not be deductible?


Guest bayinsure
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Guest bayinsure

My employer made a contribution in March of 2007 for a profit share plan for the calender year 2006. For IRA deductibility purposes am I considered covered by a defined contribution plan for the year 2007 or 2006?

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I'm just going by memory here, since I don't have time to look it up in detail, but I think your employer has an option of treating the contribution for 2006 or 2007 purposes. Whatever they decide they end up creating a precedent which is not supposed to be changed in subsequent periods, but that is not a completely hard and fast rule; just that the IRS is concerned about flip-flopping.

Sorry I don't have time to do more.

Maybe this will jog somebody else's memory that can pull a cite easier than I can at the moment.

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Guest bayinsure

Thank you for the quick replies. This still confuses me because I wasn't even aware that my company was going to do a profit share contribution for 2006 until this month when they announced it via email. Honestly, my wife & I had already set up traditional IRAs with the hope of being able to use them as tax deductions & I was hoping that because the contribution was made in 2007, that somehow it would mean I was okay for 2006.

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Thank you for the quick replies. This still confuses me because I wasn't even aware that my company was going to do a profit share contribution for 2006 until this month when they announced it via email. Honestly, my wife & I had already set up traditional IRAs with the hope of being able to use them as tax deductions & I was hoping that because the contribution was made in 2007, that somehow it would mean I was okay for 2006.

For now, I would take the position that you relied on the W-2 your employer sent you earlier this year. Your employer will have to tell you if this causes a change to what they previous reported for box 13 (i.e., the checkbox for "retirement plan").

Kurt Vonnegut: 'To be is to do'-Socrates 'To do is to be'-Jean-Paul Sartre 'Do be do be do'-Frank Sinatra

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Guest bayinsure

For now, I would take the position that you relied on the W-2 your employer sent you earlier this year. Your employer will have to tell you if this causes a change to what they previous reported for box 13 (i.e., the checkbox for "retirement plan").

Yes, you are correct. I went off of my W-2 having box 13 blank with no check for me being in a retirement plan. So I guess when I am painfully learning is that if my employer makes a PS contribution in 2007, but says it is for 2006 ... no matter if box 13 is marked or not on my W-2 ... I am covered by a defined contribution plan for the year 2006 & can't use my IRA as a tax deduction?

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My employer made a contribution in March of 2007 for a profit share plan for the calender year 2006. For IRA deductibility purposes am I considered covered by a defined contribution plan for the year 2007 or 2006?

2006

2007, the year the contribution was deposited to the plan

Life and Death Planning for Retirement Benefits by Natalie B. Choate
https://www.ataxplan.com/life-and-death-planning-for-retirement-benefits/

www.DeniseAppleby.com

 

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Guest bayinsure

My employer made a contribution in March of 2007 for a profit share plan for the calender year 2006. For IRA deductibility purposes am I considered covered by a defined contribution plan for the year 2007 or 2006?

2006

2007, the year the contribution was deposited to the plan

So was the first person who responded and said 2006 incorrect? Sorry, but I just want to get a 100% final answer.

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name='bayinsure' date='Mar 27 2007, 04:35 PM' post='145608']

For now, I would take the position that you relied on the W-2 your employer sent you earlier this year. Your employer will have to tell you if this causes a change to what they previous reported for box 13 (i.e., the checkbox for "retirement plan").

Yes, you are correct. I went off of my W-2 having box 13 blank with no check for me being in a retirement plan. So I guess when I am painfully learning is that if my employer makes a PS contribution in 2007, but says it is for 2006 ... no matter if box 13 is marked or not on my W-2 ... I am covered by a defined contribution plan for the year 2006 & can't use my IRA as a tax deduction?

If the profit sharing plan is the only plan in question, and the contribution was deposited in 2007, then the W-2 is correct. You are not active for 2006. You are active for 2007, the year the contribution was deposited to the plan

Life and Death Planning for Retirement Benefits by Natalie B. Choate
https://www.ataxplan.com/life-and-death-planning-for-retirement-benefits/

www.DeniseAppleby.com

 

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My employer made a contribution in March of 2007 for a profit share plan for the calender year 2006. For IRA deductibility purposes am I considered covered by a defined contribution plan for the year 2007 or 2006?

2006

2007, the year the contribution was deposited to the plan

So was the first person who responded and said 2006 incorrect? Sorry, but I just want to get a 100% final answer.

Looks like we were typing at the same time.

The issue of determining active participant status is kinda convoluted.

The type of plan must be considered.

Had the plan been a money purchase pension plan, then the answer would have been 2006.

For a profit sharing or SEP IRA, it would be 2007 for the question you posed

Life and Death Planning for Retirement Benefits by Natalie B. Choate
https://www.ataxplan.com/life-and-death-planning-for-retirement-benefits/

www.DeniseAppleby.com

 

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Guest bayinsure

Thank you for the clarification!! I declined to contribute to my company's 401K last year, so the only plan in questions is the Profit Sharing plan. Any idea why the other posts thought it would be for 2006?

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There is always confusion on this issue.

Profit Sharing Plans and SEPS are discretionery. For Discretionery plans, active participation is determined by the year "IN WHICH" the contribution is made. There is a special rule for employers that make two years contributions to discretionery plans in the same year. Active participation is deemed to exist in the following year as well.

Pension Plans require a contribution. For these type of plans, active participation is determined by the year "FOR WHICH" the contribution is made.

That way an employer that makes a discretionery contribution can make it after w-2s are due and not have to correct their reporting

I wish I could give you a site but this is my quick answer. I'll try to post the code specific answer later.

JEVD

Making the complex understandable.

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Guest bayinsure
There is always confusion on this issue.

Profit Sharing Plans and SEPS are discretionery. For Discretionery plans, active participation is determined by the year "IN WHICH" the contribution is made. There is a special rule for employers that make two years contributions to discretionery plans in the same year. Active participation is deemed to exist in the following year as well.

Pension Plans require a contribution. For these type of plans, active participation is determined by the year "FOR WHICH" the contribution is made.

That way an employer that makes a discretionery contribution can make it after w-2s are due and not have to correct their reporting

I wish I could give you a site but this is my quick answer. I'll try to post the code specific answer later.

Thank you jevd. If you can provide a site when you have a chance I'd greatly appreciate it.

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a taxpayer who files a joint return for 2006 can take a 4k IRA deduction if the adjusted gross income does not exceed 75k. The deduction phases out between 75-85k.

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Ah, yes, 87-16. Only 20 years ago. Should be fresh in everybody's memory, don't you think?

First of all, on a practical level, you go by what is on your W-2. If your W-2 doesn't have the box checked, then you should be ok.

You should check with your employer to ensure they aren't planning to issue an amended W-2. If they are planning on doing that, perhaps you can talk them out of it with the information you've found out here?

As has already been mentioned, the rules are somewhat convoluted. But in certain circumstances they are clear. To really understand what the answer to the question is, you need to know a whole bunch of information which is typically only available to the employer. As such, it is their responsibility to tell you what to do, and they do that by checking or not checking the box on the W-2.

So, let's knock them out a few at a time.

1) In the normal course of events, with a contribution being made in 2007 for the 2006 year, you would be treated as active for 2007 and not for 2006.

2) An exception occurs if the contribution for 2006 was because the contribution was required due to the fact that the plan was "top heavy" for 2006. In this case, the IRS considers the required contribution to be something that the employer should have known about and therefore you are stuck with treating the contribution for 2006. Only your employer would know if this is the case. If it is, they will be planning on re-issuing the W-2's and you are stuck. If so, you have until 4/15 to take out your contributions from the IRA without suffering any penalty.

3) Another exception occurs if they already made a contribution for 2005 in early 2006, thereby making you an active participant for 2006 even if they didn't make the contribution in 2007 you mention. If this is the case, though, they should have been aware of it and already marked your W-2, so I'd be surprised if this is the case.

Hopefully, this is enough information for you to go back to your employer and find out the real skinny.

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Guest bayinsure
Ah, yes, 87-16. Only 20 years ago. Should be fresh in everybody's memory, don't you think?

First of all, on a practical level, you go by what is on your W-2. If your W-2 doesn't have the box checked, then you should be ok.

You should check with your employer to ensure they aren't planning to issue an amended W-2. If they are planning on doing that, perhaps you can talk them out of it with the information you've found out here?

As has already been mentioned, the rules are somewhat convoluted. But in certain circumstances they are clear. To really understand what the answer to the question is, you need to know a whole bunch of information which is typically only available to the employer. As such, it is their responsibility to tell you what to do, and they do that by checking or not checking the box on the W-2.

So, let's knock them out a few at a time.

1) In the normal course of events, with a contribution being made in 2007 for the 2006 year, you would be treated as active for 2007 and not for 2006.

2) An exception occurs if the contribution for 2006 was because the contribution was required due to the fact that the plan was "top heavy" for 2006. In this case, the IRS considers the required contribution to be something that the employer should have known about and therefore you are stuck with treating the contribution for 2006. Only your employer would know if this is the case. If it is, they will be planning on re-issuing the W-2's and you are stuck. If so, you have until 4/15 to take out your contributions from the IRA without suffering any penalty.

3) Another exception occurs if they already made a contribution for 2005 in early 2006, thereby making you an active participant for 2006 even if they didn't make the contribution in 2007 you mention. If this is the case, though, they should have been aware of it and already marked your W-2, so I'd be surprised if this is the case.

Hopefully, this is enough information for you to go back to your employer and find out the real skinny.

Again, thanks so much for all the input. I spoke with my employer and they stated that my PS contribution was discretionary & was not required due to the fact that the plan was "top heavy" for 2006. They also confirmed I would not be receiving a amended W-2. So I believe I am good to go, right?

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I had a problem with something very similiar to this. Back in the 1980s, my wife worked as a graphic designer in a small studio (about a dozen artists) associated with a very large union print shop (hundreds of employees). She was never given any material that indicated she was a participant in a pension fund, however her W2s for two years were marked as if she was. She never got any information about contributions made in her name, or a vesting schedule.

We opened and funded IRA accounts for two years. Many years later, the IRS wrote us an said she was not eligible to participate. We disputed that because we thought she was not a member of any plan. The IRS required us to get a letter from the company, but they refused to reply. After another round with the IRS, we sent a second letter to the company including a sentence the IRS suggested we add about ERISA compliance. Bingo. That got a letter from the company with the following carefully chosen words.

"XXX is not eligible to any funds related to the pension plan at company ZZZ."

While they did not exactly answer the question of "participant", the IRS decided in our favor and let the IRAs stand.

We subsequently heard that management had a meeting with all employees of the graphics department and announced that they were now participants in the pension plan! The designer's received statements with contributions and were told they were getting credit for vesting. We suspect that the pension plan was driven by the union side of the business, and the impact on the much smaller non-union graphic design office had been overlooked. Our letter (with the key IRS suggested language) was very beneficial to a dozen designers!

And, after a year of getting that mess cleaned up... we got the exact same audit issue for the next two tax years. We were able to "ditto" on the phone with the IRS. Note, the real issue of "participation" in those three years was never actually resolved! Just not eligible to any funds.

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  • 2 weeks later...

Just to help. The actual citation is §1.219-2(d)(1) Definition of active participant

Here the regulations provide:

This paragraph applies to profit-sharing and stock bonus plans. An individual is an active participant in such plans in a taxable year if a forfeiture is allocated to his account as of a date in such taxable year. An individual is also an active participant in a taxable year in such plans if an employer contribution is added to the participant's account in such taxable year. A contribution is added to a participant's account as of the later of the following two dates: the date the contribution is made or the date as of which it is allocated. Thus, if a contribution is made in an individual's taxable year 2 and allocated as of a date in individual's taxable year 1, the later of the relevant dates is the date the contribution is made. Consequently, the individual is an active participant in year 2 but not in year 1 as a result of that contribution.

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Mike Preston,

Just a slight clarification regarding the removal of an Excess contribution to an IRA. Excesses may be removed by Tax Filing Date plus extensions and an extension request need not be on file. See form 5329 instructions.

JEVD

JEVD

Making the complex understandable.

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Thank you for the clarification!! I declined to contribute to my company's 401K last year, so the only plan in questions is the Profit Sharing plan. Any idea why the other posts thought it would be for 2006?

I have just noticed this thread and saw this comment. I guess bayinsure still needs to go by the W-2 that the employer prepared, but if he is eligible to contribute to a 401(k) doesn't that count as an active participant?

William C. Presson, ERPA, QPA, QKA
bill.presson@gmail.com
C 205.994.4070
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declined to contribute to a 401K - whooaaaa

If there was a matching amount from your employer, this was a mistake. Take the 50% or 100% immediate gain (if you had a 2:1 or 1:1 match) every year you can. An investment takes many years to achieve the same results.

If you can do both - you are twice blessed.

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  • 2 weeks later...
Guest bayinsure
declined to contribute to a 401K - whooaaaa

If there was a matching amount from your employer, this was a mistake. Take the 50% or 100% immediate gain (if you had a 2:1 or 1:1 match) every year you can. An investment takes many years to achieve the same results.

If you can do both - you are twice blessed.

Hey John, I know it was a big mistake on my part not to contribute to my works 401K. My employer does match .50 on the dollar up to 3% of my annual salary. Our next open enrollment period for the 401K is July & I plan on contributing from then on. Trust me I'm trying to learn from that mistake. I also plan on seeing if I can do an IRA for 2007 also, but my wife is currently pregnant and that will affect our income, so I'm going to have to play with numbers to see what we can do. Thanks again for all of the great advice that you all give.

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declined to contribute to a 401K - whooaaaa

If there was a matching amount from your employer, this was a mistake. Take the 50% or 100% immediate gain (if you had a 2:1 or 1:1 match) every year you can. An investment takes many years to achieve the same results.

If you can do both - you are twice blessed.

Hey John, I know it was a big mistake on my part not to contribute to my works 401K. My employer does match .50 on the dollar up to 3% of my annual salary. Our next open enrollment period for the 401K is July & I plan on contributing from then on. Trust me I'm trying to learn from that mistake. I also plan on seeing if I can do an IRA for 2007 also, but my wife is currently pregnant and that will affect our income, so I'm going to have to play with numbers to see what we can do. Thanks again for all of the great advice that you all give.

Wait wait wait....I'm with Bill Presson on this one. If Bay is eligible to contribute to the 401k but simply chooses not to then wouldn't he be covered for 2006? Based upon what I've read he's, in a 401k plan with a discretionary profit sharing feature. Eligibility is unknown but entry dates are July 1 and January 1. Since he received the contribution in the profit sharing plan one would assume that he was eligible for the 401k at SOME time during the year. Simply electing not to defer doesn't change that. I say covered in 2006 and 2007.

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Sorry, I don't agree. See the following from IRS Notice 87-16.

A24: If an individual who is eligible to make elective deferrals under a CODA declines to make elective deferrals for a year, and no other contributions or forfeitures are allocated to such individual's account for the plan year ending with or within the individual's taxable year, is such individual an active participant for that year?

A: No. An individual shall not be an active participant merely due to eligibility to participate in a CODA.

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