Excise Tax on Late Employer Contributions?

[Guest sammy]

Due to financial problems, a company failed to make Davis Bacon contributions to its 401(k) plan by the deadline under the Davis-Bacon Act, which is the end of the calendar quarter following the calendar quarter to which the contributions relate. Davis-Bacon contributions are treated as employer contributions for testing purposes.

The DOL audited the plan, and took the position that the Davis-Bacon contributions became plan assets when they were due to the plan. The DOL agent I dealt with said that this would be the DOL's position even in the case where there is a profit-sharing plan (not subject to minimum funding requirements) and a discretionary contribution is declared. The agent said the discretionary contribution becomes a plan asset when the employer's tax return is due. So if the employer declared a discretionary contribution and then failed to make it due to a change in financial situation, it would have engaged in a prohibited transaction.

The company also had some slightly late 401(k) contributions, so in anticipation of an IRS audit, we are looking at filing Form 5330 and paying the excise tax on the prohibited transaction.

My question is, has anyone had a similar situation where the IRS took a position similar to the one that the DOL took here and assessed an excise tax on late employer contributions (not late 401(k) contributions) under a plan not subject to minimum funding requirements?

I'd hate to get stuck in the 100% tier for tax on the Davis-Bacon Contributions.

(Note, to make the DOL go away, we accepted the agent's position. However, I was not able to find any official DOL or IRS authority for the position that employer contributions become plan assets before the time when they are actually contributed to the Plan.)

[jaemmons]

I don't know if I agree with the DOL agents explanation for his/her reasoning (discretionary profit sharing analysis), but I do feel the employer has an issue with the "late deposits". These are not discretionary er $'s and thus are given a higher standard for deposit timing, which carries a potential prohibited transaction similar to those for 401k deposits. The employer chose to meet the Davis-Bacon wage requirements by providing the employees with a qnec in the plan, instead of an increase in their paycheck. This is why these $'s and the potential prohibited use associated with not depositing these $'s by the prescribed time limits within the Act, are viewed and compared by the DOL to the deposit rules for ee contributions.

[mbozek]

I would ask the agent for the authority under ERISA for the Dol position that the discretionary contributions become a plan asset when the tax return is due. The PT rules do not apply to the mandatory contribution for non key employees in a top heavy ps plan because there is no fixed date for making the contribution. Under the IRC and ERISA there is no due date for making contributions to a plan not subject to the funding standards of ERISA. The employer is entitled to take a deduction for the year the contributions are made or for a prior taxable year if the contributions are made by the due date for filing the tax return with extensions. Your client should review the plan document to determine if there is a date for making the contributions.