Suspense Accounts?

[Guest Jhagan]

This may be more of an administrative question than a Quantech question, but who better to answer than Quantech users.

In an ANNUAL money purchase plan, an employer makes a quarterly contribution for eligible payroll. The plan has a provision that you must be employed on the last day of the plan year in order to receive a contribution. The employer contributes all year for employees that are not employed on the last day of the plan year and is not allocated a contribution. What happens to those monies? Do they just appear on the plan's financials as over-contributions? Are they returned to the employer? Do most employers keep track and not contribute for those? Is the Quantech "Suspense" account utilized for these types monies. Should these monies be included in the allocation of interest?

[Guest gpr]

This is a fairly common practice among small companies who are concerned about cash flow issues. However, I can see issues with it, and first recommend to a company that they invest it in a general account outside of the plan. In this way, they can use the income on the account as part of their contribution, which reduces their need to 'find' funding. (If you put it into the plan, the income must keep the characteristic of being plan income.) However, this approach subjects the money to the claims of creditors, which might not meet the company's needs.

What we've typically done in the past when a company has insisted on prefunding to the plan is simply carry it as a pre-funded contribution on the plan-to-trust reconciliation, and not posted it to the recordkeeping system at all until it is allocated. Hence, it does not receive earnings until after it has been allocated. Instead, the income goes to existing participant accounts.

You could feasibly place it into a pre-funded contribution account (similar to a suspense account) on the recordkeeping system, but then you would have to determine if you want it to get earnings or not.

If you don't want it to receive earnings, you have to exclude that account from your normal income allocation base. If you want it to receive earnings, you include it in your normal allocation base, but then must have an additional income allocation formula built to allocate that income. You would have to specify how that income is allocated separately from other income (assuming your allocation base for this portion would be the allocated contribution only).

One of the concerns with prefunding the contribution to the plan is how you handle it if you have overfunded by year-end. The snap answer is to not fund your final quarter's contribution until you determine the final contribution amount. However, if there is a significant reduction in the workforce, you could possibly run into a situation where you are overfunded even if you make no additional contribution in the final quarter.

[Kirk Maldonado]

Other than a leveraged ESOP, or to hold excess annual additons, a tax-qualified retirement plan may not have a suspense account. Revenue Ruling 80-155.

[Guest Jhagan]

Thanks Kirk - that brings up a good point. We administer governmental plans, which are not actually submitted for qualification, but for those qualified plans . . are those "over-contributions" returned to the employer each year? Can they be held in a "suspense" account to be used to reduce future contributions? Do most employers keep track of this and correct it by year-end?

[Dowist]

I have a couple of questions on the suspense account issue.

1. What is a suspense account anyway? Would it be defined as an amount that is unallocated after the end of an allocation period? Or after the end of the year? When is it permissable to prefund - only in the year in which the allocations occur? - or could you make a contribution in year 1 that would be allocated in year 2?

I guess my real question is what is the purpose of the suspense account restriction? Is it to prevent prefunding? I suppose it is - but it would seem to me there would be a distinction - at least on the IRS audit level - between inadvertent and intentional prefunding.

2. My second question is - what are you supposed to do if you inadvertently prefund? The money purchase pension plan question is a good illustration of the dilemma. It seems like the prefunding with quarterly contributions is a good idea - certainly the rules would want to encourage early funding of employer obligations (underfunding being a much more sever issue than overfunding). And unlike a profit sharing plan, you can't just allocate the excess amount contributed - you would really have a qualification question then.

This seems like one of those areas where you just have to do what you have to do to correct the problem, and try not to do it again.

[Kathy]

Just to add a few more questions (to which I don't have the answers)

I don't think overfunding to the plan is one of the valid reasons to return money to the employer - mistake in fact? probably not. Secondly, isn't there an excise tax on nondeductible contributions? Once it is put into the trust, it is a contribution and if it exceeds the 412 minimum funding requirement, it's not deductible is it?

[This message has been edited by Kathy (edited 05-25-99).]