Recurring and Substantial Contributions

[MarZDoates]

Does anyone know if there is guidance on what is meant by "recurring and substantial contributions" as referred to in Treas Reg 1.401-(b)(2). Client has a profit sharing plan but has not made contributions for the last few years. I am trying to determine if he has a "permanency" issue or possibly a deemed termination (if there is such a thing).

[Belgarath]

Try 1.411(d)-2(d)(1). It's not perfect, but better than nothing. Also, IRS audit guidelines in IRS Announcement 94-101.

[mbozek]

The IR Manual on plan terminations, 7.7.2.2.6.1, states that a discontinuation of of contributions may be deemed to occur in a ps plan if the er has failed to make substantial contributions in 3 of 5 years and there is a pattern of profits earned.

[MarZDoates]

Thank you.

[david rigby]

Text of the IRS manual mentioned above:

7.7.2.2.6 (04/20/99)

Discontinuance of Contributions

IRC 411(d)(3) requires that, in the case of a plan to which IRC 412 does not apply, upon complete discontinuance of contributions under the plan, the rights of all affected employees to benefits accrued to the date of such discontinuance, to the extent funded as of such date, or the amounts credited to the employees' accounts, must be nonforfeitable. See Reg. 1.411(d)-2(a)(1)(ii).

A determination that contributions have been discontinued and the date upon which such discontinuance occurred requires consideration of all the relevant facts and circumstances.

A discontinuance of contributions may occur although some amounts are contributed by the employer under the plan if such amounts are not substantial enough to reflect the intent on the part of the employer to continue to maintain the plan. See Reg. 1.411(d)-2(d).

If the employer has failed to make substantial contributions in 3 out of 5 years, and there is a pattern of profits earned, consider the issue of discontinuance of contributions.

If the employer has failed to make significant contributions in years prior to the proposed year of termination, consider whether an earlier discontinuance has occurred.

Prior to the TRA '86, (or if the contributions are limited to the employer's profits), the employer must have had sufficient profits (as defined by the plan) for the years under consideration to make contributions.

For plan years beginning on or after 1/1/86, profits are no longer required for making contributions to a profit sharing plan. See IRC 401(a)(27).

A temporary cessation of contributions in a profit-sharing or stock bonus plan may not constitute a discontinuance of contributions. However, if this becomes a discontinuance, the discontinuance becomes effective not later than the last day of the taxable year of the employer following the last taxable year of such employer for which a substantial contribution was made under the profit-sharing plan, if a single employer plan. In the case of a profit sharing plan maintained by more than one employer, the discontinuance is effective not later than the last day of the plan year following the plan year within which the last substantial contribution was made by any employer. See Reg. 1.411(d)-2(d).

A determination that contributions have been discontinued and the date upon which such discontinuance occurred requires a consideration of all the relevant facts and circumstances. See Reg. 1.411(d)-2(d).

Comment: Notice the last sentence above.

7.7.2.2.6.1 (04/20/99)

Processing Step

Generally, in a profit-sharing or stock bonus plan, if the employer has failed to make substantial contributions in 3 out of 5 years, and there is a pattern of profits earned, consider the issue of discontinuance of contributions.

NOTE:

Unless there are participants with less than 100% vesting during the years under consideration, there is no practical consequence to the discontinuance of contributions issue.