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Safe Harbor contribution deadline


Jakyasar

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Hi all

I am asking the following 2 scenarios on behalf of someone who is not my client but asked me about it. They deal with a payroll company for their plan.

Scenario 1:

3% non-elective safe harbor for 2020, they do not have the money to make it by Friday. They already missed the 9/15/2021 deduction deadline.

I thought that they had till 12/31/2021 to finalize the 2020 SH, I thought wrong?

Assuming that it can be done by 12/31/2021 (after 10/15/2021), it will be deductible for 2021.

However, it will not affect the 2021 415c limits, correct?

Scenario 2:

Plan sponsor did not make any contribution for 2020 by 9/15/2021 corporate deadline

Plan has 3% non-elective safe harbor for 2020 plus they want to make profit sharing for 2020.

For the profit sharing to be for 2020, they need to deposit by 10/15/2021, correct?

How about the safe harbor, let's say similar approach as in scenario 1 i.e. can make it by 12/31/2021?

In both scenarios, they will have anough payroll in 2021 for the 2020 and 2021 contributions to be deductible. 415c issue, another story.

Thank you

 

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My understanding is the same as yours.

For 2020 deduction by due date of tax return with extension. Which you state as 9/15.

For 2020 annual addition no later than 30 days after the tax return with extension. So if deposited by 10/15 30 days after 9/15 then 2020 annual addition, if deposited between 10/16 and 12/31 2021 annual addition.

To meet 12 month Safe Harbor deposit deadline deposit by December 31, 2021.

In scenario 1 yes deposit it by 12/31/2021 and deduct it in 2021 but get it in by 10/15 if you want it as 2020 annual addition.

In scenario 2 yes if they want to make PS contrib to 2020 annual addition it would need to be deposited by 10/15 and designate as 2020 contribution. If 3% deposited by 10/15 would be 2020 annual addition if done after 2021 annual addition. I'd make sure the client keeps good records about what is what if they split it deposits before and after 10/15 but all of it would be against 2021 deduction limit

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Hi Lou

Thanks for your comments.

I thought that you could get in the 2020 SH by 12/31/2021 and till be applicable for 2020 (not a deduction question) but not being a DC person, possibly thought wrong.

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13 hours ago, Jakyasar said:

I thought that you could get in the 2020 SH by 12/31/2021 and till be applicable for 2020 (not a deduction question) but not being a DC person, possibly thought wrong.

No, that's an "issue" that I don't think Congress understood when they said SH was due 12/31 of the following year.  Technically if someone had no income in the following year they shouldn't get a contribution due to 415 (if deposited more than 30 days after extended due date) but SH rules say they have to get it, so the general thinking is that the SH rules control.  

Ed Snyder

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I've always thought of it that way too. I don't think you can get away with not giving the SH just because someone terminated and you made the contribution in the approved 12 month window but not in time for prior year annual addition. And I'm pretty sure if the IRS did have any issue with it because of the conflicting rules they would treat it as self correction under EPCRS. Though I don't its ever been specifically addressed in any IRS guidance.

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10 hours ago, Lou S. said:

I've always thought of it that way too. I don't think you can get away with not giving the SH just because someone terminated and you made the contribution in the approved 12 month window but not in time for prior year annual addition. And I'm pretty sure if the IRS did have any issue with it because of the conflicting rules they would treat it as self correction under EPCRS. Though I don't its ever been specifically addressed in any IRS guidance.

I had not thought about this, but it seems to me that if they had to publish guidance, e.g. a Revenue Ruling, the IRS would say that the contribution needs to be distributed to the participant as taxable income, since exceeded 415(c) limit. I don't think the 401(k) safe harbor would trump the 415 limit.

Luke Bailey

Senior Counsel

Clark Hill PLC

214-651-4572 (O) | LBailey@clarkhill.com

2600 Dallas Parkway Suite 600

Frisco, TX 75034

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18 hours ago, Jakyasar said:

Excuse my not understanding here (not clear to me at least), to simplify, deposit by 12/31/2021 and apply to 2020? Is that what you are saying?

No, apply to 2021 as an annual addition.  If it exceeds 415 due to little or no compensation, then shrug your shoulders and move on.  If it exceeds 415 because significant contributions are being made in 2021, well, I'm not sure because I've never seen it.

(I'm giving a very technical answer above but I guess to be honest, in our admin system, everything would be going in as a 2020 annual addition.  I wouldn't know how to split them out to 2021, except manually.  I can think of one plan that consistently does SH late every following year and we just know that they never do more than the SH and don't worry about it.)

Luke Bailey may very well be correct about the proper treatment - distributing as taxable income - but I suspect they (IRS) are aware of the issue and choose not to give guidance because they'd just as soon not create such a hassle for such a tiny thing.

Ed Snyder

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Looks like I opened a can of worms here.

Bird, referring to the second paragraph, it should be applied towards 2020 otherwise how does one satisfy the 2020 3% non-elective safe harbor requirement?

It is deductible in 2021 though.

I think the best solution is to determine/limit the 2021 415c limits using both the 2020 SH and whatever is contributed for 2021 and not exceed. The next step is to make sure that the plan sponsor deposits everything timely starting with 2022 plan year end and not deal with any of these issues.

Anyone disagree?

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13 hours ago, Luke Bailey said:

I had not thought about this, but it seems to me that if they had to publish guidance, e.g. a Revenue Ruling, the IRS would say that the contribution needs to be distributed to the participant as taxable income, since exceeded 415(c) limit. I don't think the 401(k) safe harbor would trump the 415 limit.

I don't disagree with you but absent written guidance from the IRS I think Bird has a reasonable approach and it's the one we follow as well.

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19 hours ago, Jakyasar said:

Bird, referring to the second paragraph, it should be applied towards 2020 otherwise how does one satisfy the 2020 3% non-elective safe harbor requirement?

Yes of course.  I thought we were talking about 415 with the "applied towards" discussion.

As far as the rest, what are you going to do if someone gets SH for 2020 but has no comp in 2021?  (Rhetorical Q; no need to reply...IMO it would be criminally silly to do anything other than just make the contribution and move on. I'm done here.)

Ed Snyder

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There is a way to have a safe harbor contribution deposited after the Section 415 deadline counted as an annual addition in the prior year.  Corrective allocations under EPCRS are treated as annual additions for the year they relate to, not the year of deposit.  Rev. Proc. 2021-30 6.02 (4)(b).  Note, this only applies to required contributions.  If you don't feel that having a 2020 safe harbor treated as a 2021 annual addition is something that warrants correction, have them deposit on 1/1/22 or later. 

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