VERY late Profit Sharing Contribution

[Guest AdminFL]

An employer does not deposit a profit sharing contribution for 2 years. The participant statements have included the contribution as a receivable. Can the employer now make the deposit? What are the ramifications of this?

What happens if he deducted the contribution 2 years ago? What if he did not?

Any assistance is appreciated.

[mbozek]

Under IRC 404(a) The contributions are deductible in the year they are made, not in the year they are credited to the plan.

The employer has engaged in a prohibited transacton subject to a 15% initial tax because the failure to make a contribution is an impermissible loan of plan assets to the employer. The PT should have been reported on the 5500 for the year the contributions were due.

If the employer claimed a deduction for contributions that were not made then the employer must amend the tax return.

One more queston: If the participant's statements have included the contributions as a receivable what should be the investment return?

There is also a queston of breach of fiduciary duty for not commencing an action to recover the contributions (but I guess the employer is also the fiduciary). The fiduciary coyuld be personally liable.

Also note: Sending fraudent information to participants is a federal crime.

This employer needs to seek the advice of counsel ASAP.

[Belgarath]

I agree with Mbozek - they need a good ERISA attorney, and fast!

But I do have a question - Mbozek - since I've never seen a situation like this, let me play devil's advocate for a minute. Aside from their other problems, since it is a profit sharing plan, where there are no contributions required anyway, couldn't they simply amend tax forms, 5500's, and valuations, to properly reflect the lack of contribution? Perhaps the consequences could end up being less dire than one might initially think. I don't see, offhand, that it is a prohibited trtansaction, since with no legally required contribution, I don't see how it can be an impermissible loan to the employer. What do you think?

[mbozek]

Belgarth-- I have much sympathy for the devil here. If I was counsel I would make the same arguments -but there are a couple of violations of the ten commandments of ERISA:

First the employer has listed the contributions as accounts receivable-- Is this sufficient to create a plan asset? If yes how is it valued under the plan?If no I think the statements to participants is an inculpatory statement of awareness by the fiduciary (who is probably the employer) of the failure to make the contribution and thus is a breach of duty. Perhaps the plan language spells this out as a fiduciary duty. There is sufficient authority that the failure to make a contribution is a loan of plan assets to the employer.(Is there much difference between an account receivable and a promissory note?) If the contribution has not been deposited into the plan isn't there a liability on the part of the fiduciary for breach of the exclusive benefit rule at least for lost interest? If there is no fiduciary liability then when can an employer ever be liable for the failure to make a discretionary contribution to a PS plan? Or can an employer avoid having to make a payment forever by listing the contributions as accounts receivable?

It seems to me that there is either a breach of fiduciary duty or a PT, maybe both. That being said the client needs to decide on a course of action on the advice of counsel as how to proceed.

[david rigby]

In addition, have any participants been paid out with values assuming the existence of the accrued contribution? If there had been no contribution, would that have changed the results of any top-heavy test?

[Guest AdminFL]

There have been no terminations or distributions.

[Belgarath]

Thanks for the info.

[Guest Harry O]

Was there any corporate action to authorize the contribution -- board resolution, etc.? Did the corporate tax return include a deduction for the contribution?

[mbozek]

Belagarth: any time. I dont mind comments telling me I am wrong.

[Guest AdminFL]

Thank you all for your assistance.