Top Heavy Contribution Timing

[kocak]

What is the date I need to make a top heavy contribution by when deductibility is not an issue? Do I have 12 months after the allocation date (like a QNEC made to correct an ADP failure) or 30 days after the 404 period ends, like an annual addition?

Thanks

[mbozek]

What does the plan say? I though that the failure of an employer to make a contribution as required under the terms of the plan is a prohibited transaction because it is a loan of plan assets to the employer. PTs carry 15% excise tax penalty which can increase to 100%.

[Mike Preston]

This question has been asked of the IRS a number of times, and never had a complete response. There appears to be no deadline. However, as you point out, contributions made after the date which is 30 days after the extended 404a6 deadline do not count as annual additions for the period allocated, but instead for the limiation year contributed. As we move into post-EGTRRA where the DC limit is 100% of pay, that will have almost no impact.

I have heard some muse that the deadline for making a top-heavy contribution is the day before one receives an audit notice. I think the IRS might be able to make a case that the plan is not being operated in accordance with its terms if that were to take place.

But I haven't seen any documents that specify a deadline for top-heavy contributions. So exactly where the deadline is, well, is anybody's guess. Until somebody can come up with a cite, that is.

[Kirk Maldonado]

I thought that the penalty for the failure to make a contribution required by the minimum funding standards was an excise tax under Section 4971.

[mbozek]

Kirk: I think that is true for mp and DB plans which are required to make contributions under IRC 412 within 8 1/2mos after end of plan year. In a DB plan a TH contribution would not be required if the plan met the minimum funding standards. But what about PS plans not subject to the funding standards?

Kocak: Why isnt deductiblity an issue? Is it because the a non profit sponsors the plan or because the employer will have a tax loss for the year?

[kocak]

If I want my top heavy allocation to be deductible in the year allocated, I know I need to deposit it by the 404 deadline. But if I don't want to deduct it in the year allocated, I couldn't find the deadline. That was why I said deductibility wasn't an issue.

I think we'll recommend they deposit it before the 415 grace period ends (30 days after 404 period ends). Thanks for all your help.

[Mike Preston]

My comments were intended to address plans without otherwise existing deadlines; i.e., profit sharing plans.

[Richard Anderson]

As mbozek pointed out, I would check the document. It is not uncommon for language to be in the boiler plate section of a document to state something on the order of: the contribution "must be made before the time prescribed for filing the Company's federal income tax return (including extensions).

[AndyH]

Right, but what is that date for a non-profit? A DOL official told me that it is the DOL's position that a non-profit does not file a federal income tax return.

The context was a 5500 extension where a non-profit has an extension period beyond the 9.5 months to file a 990 and the 5500 instructions say the 5500 is extended to the due date, including extension, for filing a federal tax return.

[Kirk Maldonado]

My understanding is that although some tax-exempt organizations (e.g., churches) are exempt from this requirement, the rest must file a Form 990 with the IRS annually.

[mbozek]

I thought the exemption from filing a 990 applied to txos with receipts of $25,000 or less but this info is a few years old.

[AndyH]

What I'm saying is that a representative of the DOL told me that the DOL's position is that a 990 is not a "Federal income tax return". They argued that a non profit does not file a "Federal income tax return".

[mbozek]

I think the DOL is mistaken-- A 990 is an income tax return for an non profit-- Its just that the NP does not pay taxes on the return. I dont think the timing of the contribution is as important as the question of when/how is the TH contributions accounted for as a plan asset for participant's accounts.

[John A]

FYI:

http://www.benefitslink.com/cgi-bin/qa.cgi...d=144&mode=read

Does anyone have experience with correcting a top-heavy failure by filing with the IRS for correction approval? What day has the IRS treated as the day the top-heavy failure occurred?

Also of interest:

http://www.benefitslink.com/cgi-bin/qa.cgi...atabase=qa_401k

although this does not seem to address the issue for nonprofits.

[mbozek]

My understanding is that the IRS prefers employers to self correct such defects.