Late Quarterly Interest Charges

[Blinky the 3-eyed Fish]

My question relates to the use of the credit balance to satisfy the 412(m) charges.

I have an employer who funds the plan throughout the year. His schedule of contributions in 2001 is:

2/28/01 - 10,000

5/31/01 - 25,750

7/31/01 - 10,000

11/30/01 - 10,000

The 5/31/01 contribution was deemed to be for the 2000 plan year and was the exact amount to satisfy the maximum deductible contribution. As a result there was a credit balance in the amount of 5,000.

From Notice 89-52, I know that a credit balance will accrue interest from the last day of the prior plan year to be used to satisfy the late quarterly contribution for the year. But I also know that the credit balance cannot satisfy a late quarterly payment until the contribution that caused the credit balance is actually made.

Assuming the quarterly payment due 4/15/01 is 20,000, I am thinking that I use the 2/28/01 and 7/31/01 contributions to satisfy it and disregard the 5/31/01 contribution until the 7/15/01 payment? Then when using the 5/31/01 payment interest would accrue from 1/1/01.

Anyone think differently?

[mwyatt]

Reading Q&A 12 as I write. I think that in the first part of the answer where it speaks of using the 12/31/88 Credit Balance of $10k, note that the 1988 contributions were all deposited by 12/31/88 (hence the ability to credit FSA interest from 12/31/88 to 4/15/89).

Your situation falls in the second part of the answer, where the CB exists as of 12/31/88, but due to a contribution made on 5/31/01. I would apply payments for 4/15/01 payment in your example where you have a $20k Quarterly Contribution (QC) as follows:

2/28/01 contribution of $10k, increased @ FSA i% to 4/15/01; you don't specify a rate, so let's just say that this increases to $10,100 for the sake of argument. So you have remaining QC of $9,900.

Apply $5,000 5/31/01 payment QC1 balance, so you have remaining balance of $4,900; also calculate late interest charge on $5k.

Apply $4,900 from your 7/31/01 $10k payment to complete QC1; calculate late interest charge on $4,900 from 4/15/01.

Balance of $5,100 applies to 7/15/01 QC.

I wouldn't think that you would skip the $5,000 credit balance in applying since it was actually made prior to 7/31/01 deposit.

Key observation: Just treat the contribution equalling the credit balance (if made after EOY) as regular deposit made on actual date of deposit and you should be fine.

[Blinky the 3-eyed Fish]

Mywatt, while I'll agree that your method is plausible, a different methodology was presented in every problem I encountered while I studied for the exams.

For every solution I saw relating to late quarterlies the credit balance received interest from the last day of the prior plan year, not from the date of contribution. To paraphrase Notice 89-52 Q-11, contributions made within the 8 1/2 month period following the end of the plan year are deemed to be made on the last day of such plan year. Unfortunately, every problem I saw had the contribution for the prior year made by the first late quarterly due date, not like the situation I have here.

The above, coupled with the statement in Q-12 that contributions for the prior plan year will not be reflected in the determination of the credit balance until actually contributed, leads me to my methodology stated in my first post.

[mwyatt]

I see what you are saying about the crediting of interest from the beginning of the year on the Credit Balance. It's been about 6 years since I've had to deal too much with Qcbn interest charges, although investment returns over the last two years may fix that for my clients.

What Q&A #12 seems to be saying is that you are disqualified from using the credit balance for a particular quarter if the actual date of deposit of the amount giving rise to the FSA CB is later than the due date of the QCbn. But, ponder the following counterexample:

Same situation, calendar year plan with Required QC of $20,000, due 1/15/01, 4/15/01, 7/15/01, and 10/15/01. But client has an FSA Credit Balance of $80,000 as of 12/31/00, due to a contribution made at the last possible date of 9/15/01. Now clearly this credit balance more than satisfies the Quarterly Contribution requirements. But a strict reading says that you would be ineligible to use this balance at all towards 4/15 and 7/15 contributions and the employer would need to pony up additional dollars to satisfy these minimums. In fact, let's go further and say that your 2001 IRC 412 contribution is $0 (say it was $80,000, fully covered by the Credit Balance)., so employer has no intent to deposit anything at all for Calendar Year 2001. But our first interpretation is that the 4/15 and 7/15 contributions were never met at all, since we have decided that the CB is ineligible to satisfy these payments. I don't think that this result makes alot of sense to me. I would rather say that Late Interest would be charged on the 4/15 and 7/15 payments, based on the $80,000 increased w/ FSA interest to 9/15, and based on the 9/15 payment date. So with this interpretation, I guess I would fall back to using the 5/31 $5,000 towards the 4/15 credit balance, increased w/ FSA interest from 12/31 to 5/31.

[Blinky the 3-eyed Fish]

I agree the result might not make sense, but I don't think that is a necessary criteria for regulations.

Any other actuary out there want to chime in?

[Guest Chamelnix]

I agree with the way you do it Blinky. That is what we have always done. I think that Q&A 12 pretty clearly says that is correct (whether it makes sense or not).

Also mwyatt's let's go further example is covered by the last sentence of A12 - there is an exception to not being able to use the credit balance for the first quarter if the credit balance is greater than the required contribution.

[mwyatt]

Blinky and Chamelix - my bad. Hadn't thought of Qcbn issues in a while - helpful to read regs from time to time (haven't really looked at this stuff in excrutiating detail since developing an Excel spreadsheet back in 1989 to calculate this stuff). Also very helpful to have these discussions on the Boards (especially for us solo actuaries) before finalizing valuations/Schedule Bs.