Failure to Make MP Contribution- Prohibited Trx

[Guest attypa]

Is the failure to make a money purchase contribution by the required deadline considered to be an extension of credit to the employer and therefore a prohibited transaction?

[Kirk Maldonado]

No, but you have the excise tax on failure to satisfy the minimum funding standards.

I seem to recall that this point is addressed in the legislative history of ERISA.

[Guest attypa]

I can't seem to find anything in the legislative history, or anywhere else for that matter.

Any other ideas on where I might find the answer?

[KJohnson]

I haven't looked at it lately, but you might want to look at PTE 76-1 which speaks about the failure of a multiemployer plan to collect contribuitons from a delinquent employer and the PT "extension of credit" rammifications.

Outside the multi context, I think the analysis may turn on what are plan assets. In the 401(k) context you know you have plan assets as soon as amounts can be reasonably segregated and this gives rise to an "extension of credit" pt if they are not timely remitted.

For a plan without participant contribuitons where 412 applies, I don't think you would have "plan assets" until they were actually contributed by the employer. If the plan does not have title or claim to the assets, then it can't be extending credit. I guess language in your document could change this giving the plan "title" to the assets on the date the contributions were due for funding purposes.

[Mike Preston]

Another souce of comfort might be some private letter rulings or tax court cases where there have both been significant minimum funding violations and, yet, no assertion as to the existence of a prohibited transaction based on said violations. For example, see PLR 9146005. That one seemed to be particulary concerned, from the IRS' perspective, with hitting the taxpayer from every conceivable angle. But nary a mention of a prohibited transaction related specifically to the funding deficiency. That particular ruling seems to stand out because the prohibited transaction rules were considered when dealing with aspects other than minimum funding. Seems the IRS had a perfect opportunity to layer the prohibited transaction aspect on if they felt they could.

[jpod]

There is no pt because the "plan asset" is the receivable; nobody is doing anything with that receivable that would implicate the party-in-interest or self-dealing pt rules.

At least, that's my take on it. If there is some authority to support my interpretation I am not aware of it.

[Kirk Maldonado]

JPod:

By extension, wouldn't your analysis conclude that there is no prohibited transaction if the employer failed to forward employee contributions to the plan? I think that the DOL would disagree with you on that one.

[Mike Preston]

I agree with KJohnson. It turns on the definition of plan assets. I see two regulations. One dealing with investments. The other dealing with participant contributions. I see nothing dealing with receivables of employer contributions.

[jpod]

Kirk:

Why would we need a reg. dealing with when employee contributions become plan assets if all contribution obligations became plan assets the minute the obligation arose? As a matter of law, an employer's legal obligation to deposit employee contributions arises - i.e., it owes the plan money - at the time that money is withheld from pay or turned over to the employer's hands. But, the reg allows a short amount of time before the contributions become "plan assets" for purposes of applying ERISA.

Would you not find it illogical if employer contributions were considered "plan assets" at the minimum funding deadline, whereas employee contributions were not plan assets until sometime after the employer has possession of those contributions? If employer contributions became plan assets at the minimum funding deadline, why wouldn't employee contributions become plan assets the moment the employer has a debt to the plan?

By the way, the preamble to the PTCE that deals with late contributions to multiemployer plans (76-1) confirms that the failure by an employer to make timely contributions is not a pt. The exemption was needed to allow certain activities relating to the plan's collection of outstanding receivables that might otherwise be pts.