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SH401k w PS: Employer Deposit is late


cheersmate

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The Employer is an S Corp tax filer, calendar year, cash-basis.

The Plan covers the owner and 2 staff members, 1 of whom terminated in 2018. The other staff member terminated end of Q1 2019. There is no last day reqd for any contributions. Employer contributions: 3% SHNEC plus discretionary PS.  Plan is cross-tested.

We have just been notified that the business return was filed on time and was not extended. This is the 1st plan year and the company prepared their own returns. [... today, they did hire an accounting firm...]

  • 1120 reported $41k in retirement contributions
  • the employer had intended to contribute $49k employer contribution (SH+PS) for the year but reported $41k because it is "cash basis" and this was the amount actually deposited into the plan during 2018 (note, this $11k included 401k plus SH deposits)

Of the $41k contribution reported, only $11k was contributed by the due date of the tax return (3/15/2019). The balance remains due, therefore is outside the 30 day Annual Additions window for 2018 Limitation Year. The $11k deposited was SH but there is about $1k SH contribution remaining due for the year.

Q1: Does EPCRS provide a correction such that the employer can deposit the $30k balance ($1k SH + $29K PS) at this time and in doing so avoid amending the 2018 tax return? Or can it be deposited under EPCRS however they must amend 2018 to reduce the deduction to $11k, and deduct the $30k on the 2019 tax return, along with any 2019 plan year contributions, of course subject to 404 limits?

Q2: Also, wouldn't depositing it now for 2018 PY count towards the 2019 Annual Additions LY for each participant who shares in the allocation of it because outside the 30 day window?  If so, one participant terminated in 2018 therefore 2019 Annual Addition limit is zero for him - is there any correction available for this? The other staff member terminated at end Q1 2019... may be okay with 2019 Annual Addition limit. Will this ultimately make it impossible for the employer to contribute any PS for 2018 because of this Annual Addition issue, limiting the employer to only the SH for 2018?

Q3: If the Employer decides to leave the 2018 Return as filed, make the deposit now and the plan is later audited and the $41k deduction is  reduced to the $11k, how are the contributions over and above the $11k allocated for 2018 corrected (i.e. the $30k)? Both of the staff members are now terminated and 0% Vested in the PS portion. Assuming they elect distributions, the non-vested PS portion will forfeit ... 

Thank you in advance if you are still reading this and can provide assistance.

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1 minute ago, cheersmate said:

  

  • the employer had intended to contribute $49k employer contribution (SH+PS) for the year but reported $41k because it is "cash basis" and this was the amount actually deposited into the plan during 2018 (note, this $11k included 401k plus SH deposits)

 

** CORRECTION **

the employer had intended to contribute $49k employer contribution (SH+PS) for the year but reported $41k because it is "cash basis" and this was the amount actually deposited into the plan during 2018 (note, this $41k included 401k plus SH deposits)

 

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It's a little hard to follow but here are some thoughts -

I don't believe EPCRS can fix a deduction issue.

It sounds like the return is wrong if they used $41K as cash basis contributions but it included deferrals.  It appears that the over-deduction is $30K ($41K deducted minus $11K deposited.)

The safe harbor status is fine as long as the remaining deposit is made by 12/31.  

There is a known problem with allowing SH contributions by 12/31, but Annual Additions counting towards the current year if made after the 30 day window.  I think making the SH contribution is more important and would make it regardless of the apparent 415 violation in 2019.

I think you need to talk to the client and accountant and reach a joint decision on what to do for the un-made PS contributions.  My guess is that nobody wants to re-file and claim extra income, so the path of least resistance is probably to re-do the contributions to match the $41K deduction...and cross your fingers.  Make it clear that it is their decision.

Ed Snyder

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Thank you Bird. I read one thread of similar fact pattern (ded taken, ppt stmts issued, no deposit made, term ppts) and it was suggested that they use an 11 (g) Amendment but it isnt clear to me how that would "correct" the late deposit and annual additions matter.

Regarding "crossing fingers"... would you require the plan sponsor sign a hold harmless statement and if so do you have a sample or suggestions?

Thank you again.

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Not sure if this is a pooled or participant directed plan.  I'm also not sure how much the 2018 deferrals were.  Is it $30,000?

Is it possible to take the position that the full $41k deposited was employer contributions? 

And then correct the late deposit of deferral contributions through VFCP?

If the plan is participant directed, it might be more difficult to do.

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1 hour ago, D Lewis said:

Not sure if this is a pooled or participant directed plan.  I'm also not sure how much the 2018 deferrals were.  Is it $30,000?

Is it possible to take the position that the full $41k deposited was employer contributions? 

And then correct the late deposit of deferral contributions through VFCP?

If the plan is participant directed, it might be more difficult to do.

It is ppt directed.  The deferrals total $33k, the $3k for 12/31 payroll was deposited in 2019 (but bc they only deducted what was actually contributed IN 2018 on the 2018 return.

I have thought about doing just that with the deduction taken.. issue is we have (1) late PS deposit, which is "at risk" on audit (the issue at hand) and (2) creating new issue of late 401k deposits, ie another red flag, not to mention the contributions deposited are in s/d source accounts already...

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"Q2: Also, wouldn't depositing it now for 2018 PY count towards the 2019 Annual Additions LY for each participant who shares in the allocation of it because outside the 30 day window?  If so, one participant terminated in 2018 therefore 2019 Annual Addition limit is zero for him - is there any correction available for this? The other staff member terminated at end Q1 2019... may be okay with 2019 Annual Addition limit. Will this ultimately make it impossible for the employer to contribute any PS for 2018 because of this Annual Addition issue, limiting the employer to only the SH for 2018?"

The "30 day" rule doesn't always apply. For the terminated participant, see 1.415(c)(1)(b)(6)(ii)(A) - I think this will cover you on that piece.

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2 hours ago, Belgarath said:

 

The "30 day" rule doesn't always apply. For the terminated participant, see 1.415(c)(1)(b)(6)(ii)(A) - I think this will cover you on that piece.

Really? You think that covers a demographic failure?

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If you consider it an "erroneous failure to allocate" in a prior limitation year, then yes, I think it applies. If you consider it something else, then maybe not. Personally, for a situation like this with only one small NHC participant contribution, I'd take the chance. 

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