Can you make a missed contribution for a plan year if the 5500 was already filed?

[Jilliandiz]

Client has an ESOP. They made a 4.91% contribution to all the eligible participants. However, the owner had not sold any of his shares yet, therefore he should have also received a 4.91% ESOP contribution for their plan year that ended 1/31/03. The 5500 has been filed. Can I have the owner deposit his 4.91% contribuition he should have received and amend the 5500? What can I do here to fix this problem?

[SRM]

Assuming that the owner should receive an allocation under the provisions of the plan, then the contribution should be made. For 415 purposes, the contribution may be treated as an annual addition in the year made if it is made 30 days after the due date of the employer's tax return (§1.415-6(b)(7)(ii)). The amount may also be deductible in the following year.

What is the plan sponsor's tax year?

[Jilliandiz]

Ok, their corporate year is 1/31/03 ending and so is their ESOP year. So your saying, they can deposit his 4.91% share of contribution that he did not receive for the 1/31/03 plan year, and it can be deducted on their 2003 corporate filing? But they what would I do w/the 5500. Account for it on the 1/31/04 filing?

Thanks for your help! This gets confusing sometimes!!

[SRM]

Is this ESOP a Money Purchase Plan? If not, how was the 4.91% allocation arrived?

[Jilliandiz]

The company wanted to make a contribution of $175,000 into the account, therefore allocated to everyone was 4.91% of teh $175,000. No its not a money purchase plan, its just an ESOP???? Any other thoughts on what I can do to get that owner his money???

[Mike Preston]

This is a case of crossed-up intentions. The fact is that they made a $175,000 contribution to the plan and that the allocation of that money was incorrectly calculated. Under the circumstances, any correction you choose to make will be less than ideal. On audit, the IRS would be justified in demanding that the $175,000 be allocated in accordance with the plan's terms, which means that the allocations to all participants other than the owner were actually too high. From a fairness perspective, most people do not want to lower the allocations to "everybody other than the owner" when re-doing an allocation, but in the absence of doing something "special" I think that is the technically correct result.

In this case, maybe something "special" is an EPCRS filing? Maybe it is engaging an attorney to guide the client as to the best way to implement what they want.

[Jilliandiz]

So your saying that he cannot make a deposit to himself of 4.91% which he never received? What actually has to happen is the contribution that was deposited has to be reallocated to give him a part of it????

[Mike Preston]

Well, that is the default action. Look at it another way. Let's assume that they had wanted to make a $175,000 contribution and the result of that was that everybody received 4.85% of pay. Now, they come to you and say: "You know, this is the last year that the owner will receive any portion of the allocation, so we would like to increase what we deposited from $175,000 to $184,820. We have the money, and we really don't care whether it is deductible on our 1/31/2003 tax return - we'll just deduct the additional $9,820 on our 1/31/2004 tax return. We understand that when this additonal $9,820 is allocated to all participants they will get 4.91% of pay. We understand that the amount allocated in excess of $175,000 will be a Section 415 annual addition for the limitation year ending 1/31/2004. Is this all ok?"

What would your answer be?

[Jilliandiz]

I would agree w/your answer......because thats the answer I wanted to hear.

Ha Ha!! However, do you think there is anything wrong w/doing that??? I don't see where there could be, but you know the world of pension....its always confusing.

Thanks so much for your help and clarifying the info. for me.