Late Contributions for S412 but timely for S404 related Problem

[flosfur]

A DB plan’s Plan Year & Sponsor’s Tax Year are Calendar Year.

Sponsor is on extension (2nd extension) for tax returns until 10/15 for the years considered below - so deadline for filing tax returns & to make the contributions to the plan for S404 deduction purposes is 10/15.

Year 2000:

Deductible Contributions made Amount

S412 Min S404 Cost Amount Amount Date Deducted

50,000 50,000 50,000 20,000 08/17/01 50,000

10,000 09/10/01

20,000 09/28/01=> goes to next yr Sch B.

2000 Sch B shows a deficiency of 20,000.

--------------------------------

Year 2001

S404 Deductible Contributions made Amount

S412 Min Computed Cost Amount Amount Date Deducted

76,000 55,000 76,000?? 35,000 06/15/02 76,000

21,000 08/27/02

20,000 10/05/02=> goes to next yr Sch B.

S412 Min = NC ($55,000) plus Prior Yr Deficiency + interest (=21,000).

2001 Sch B shows a deficiency of 20,000.

---------------------------------

Year 2002

S404 Deductible Contributions made Amount

S412 Min Computed Cost Amount Amount Date Deducted

76,000 55,000 76,000?? 35,000 05/27/03 76,000

21,000 06/25/03

20,000 08/10/03

S412 Min = Prior Yr Deficiency + interest (=21,000) plus NC (=$55,000)

2002 Sch B: Total charges = $76k; Total credits (all contributions) = $96k (20k made on 10/05/02 & 76k made during 2003 by 9/15/03). Sch B shows a credit balance of 20k!!?

Since the total of S412 Min for 2000, 2001 & 2002 equals the total amounts contributed, common sense tells me there is something wrong with having a Credit Balance of $ 21k!!??

Numbers are rounded to make the math easier to follow.

[Mike Preston]

Could you format it a bit differently? The columns dont' seem to line up in my browser.

[flosfur]

Mike, here is the message reformatted (I guess the tables don't work here!).

Some numbers have been changed to simplify calcs & illustration even further.

------------------------------------------

A DB plan’s Plan Year & Sponsor’s Tax Year are Calendar Year.

Sponsor is on extension (2nd extension) for tax returns until 10/15 for the years considered below - so deadline for filing tax returns & to make the contributions to the plan for S404 deduction purposes is 10/15.

Individual Agg funding method and to simplify illustration, 0% interest assumption.

Year 2000.

S412 NC: 50k.

S404 NC: 50k.

Deductible Amount: 50k.

Contributions made:

20k on 08/17/01

10k on 09/10/01

20k on 09/28/01 => late for 2000 Sch B, so goes to next yr Sch B but deductible under S404(a)(6) since made on/before 10/15 tax filing extension date.

Amount deducted: 50k.

2000 Sch B shows a deficiency of 20k.

Year 2001.

S412 NC: 55k; S412 Min: 75k (=NC+Prior Yr Definciency+int(=0)).

S404 NC: 55k.

Deductible Amount: 75k? (Greater of S412 Min & S404 Cost).

Contributions made:

35k on 06/15/02

20k on 08/27/02

20k on 10/05/02 => late for 2001 Sch B, so goes to next yr Sch B but deductible under S404(a)(6) since made on/before 10/15 tax flinig extension.

Amount deducted: 75k.

2001 Sch B shows a deficiency of 20k.

Year 2002.

S412 NC: 55k; S412 Min: 75,000 (=NC+Prior Yr Definciency).

S404 NC: 55k.

Deductible Amount: 75k? (Greater of S412 Min & S404 Cost).

Contributions made:

35k on 05/21/03

20k on 06/25/03

20k on 08/10/03.

Amount deducted: 75k.

2002 Sch B shows a Credit Balance of 20k!! (total charges 75k, Credits 95k - 20k contrib made on 10/05/02 & 75k made during '03).

Since the total of S412 Min for 2000, 2001 & 2002 equals the total amounts contributed, common sense tells me there is something wrong with having a Credit Balance of $ 20k.

Where did the calculations or logic go wrong?

[Mike Preston]

The logic is wrong. The amount deductible under 404 is not the amount of the 412 charges for the year. It is the amount necessary to reduce the FSA balance to zero. In this case, your last year needs only 55k of new money, since the first 20k (which was deducted in a prior year) counts towards this year's FSA "requirement".

[mwyatt]

Here's where you went wrong:

Year 2001.

S412 NC: 55k; S412 Min: 75k (=NC+Prior Yr Definciency+int(=0)).

S404 NC: 55k.

Deductible Amount: 75k? (Greater of S412 Min & S404 Cost).

Contributions made:

35k on 06/15/02

20k on 08/27/02

Stop right there; the 9/28/01 contribution not shown on the 2000 Schedule B completes your funding!

20k on 10/05/02 => late for 2001 Sch B, so goes to next yr Sch B but deductible under S404(a)(6) since made on/before 10/15 tax flinig extension.

But what about the 20k made on 9/28/01 that you didn't show on the 2000 Schedule B? In point of fact, you didn't have a funding deficiency for 2001!

[flosfur]

Thanks guys.

Simply put, in applying the Max of: S404 charges less credits and S412 Minimum rule ("Max of S404 and S412 rule"), the S412 minimum for a PY is: Charges less Credits for the yr ignoring the BOY deficiency (and contributions for the yr).

Some follow up questions.

Consider the PY 2001 in my example with a pre-ret funding interest rate of 5%. There is a funding deficiency of 20k @ BOY. At 5%, the interest charge on this will be 1k @ EOY.

Part I.

Q1. For the "Max of S404 and S412 rule", will the 1k interest charge on the deficiency be part of the 2001 charges?

Q2. If answer to Q1 is yes, should this be reduced by the interest credit on the late contribution of 20k for '00 made on 9/28/01 for the period thru 12/31/01?

I am leaning towards "yes" on both.

Part II.

For computing the 2001 minimum funding requirement (MFR) to determine the Quarterly contributions, the funding deficiency would be ignored (?) since that would have been part of the 2000 MFR.

Q1. Should the interest charge of 1k also be ignore for computing the 2001 MFR?

Q2. Should the interest credit on the 20k late contribution for 2000 made on 9/28/01 be ignored for computing the 2001 MFR?

My answer would be "no" on both.

Thanks for your input.

[Mike Preston]

Part I, Q1 and Q2 are indeed both yes.

Part II, pre-Q is effectively yes, because 90% of $55,000 / (1.05) is still greater than 100% of $50,000. Had the new year's required contribution as of 1/1/2001 been less than 100% of the 2000 required contribution, the net result is that the quarterly contribution for 2001 would have been calculated on a lower number. In that case, the amount used to determine 2001 funding would have included the deficiency, because it would have been part of what establishes the required contribution for the 2001 year (as of 1/1/2001).

Part II, Q1 and Q2 are both no. Further, the $20,000 contribution on 9/28/2001 counts towards the 2001 quarterly contribution requirements since it wasn't used for the 2000 Schedule B.