Failed to make contributions

[Guest Ed Walker]

Client failed to make 2002 3% safe harbor or Profit sharing contributions. Of coarse he made his $11,000 401k!

Obviously the 2002 tax return is wrong and the 5500.

However, is the safe harbor a required contribution for 2002 and subject to penalities for failure to fund? My reaction is "no" this is still a profit sharing plan!

However, can we make the safe harbor contribution now and allow us to skip the ADP test for 2002?

Thoughts,comments and resources are appreciate.

ED

[Archimage]

Safe harbor contributions for 2002 were due by 12/31/03 according to Notice 98-52. I think the plan is stuck giving the 3% SHNEC. Participants were given a notice at the beginning of the year telling them this may/will happen. Participants based their decisions on this information the client provided. The client will have to fund the SHNEC and loses the safe harbor status for 2002.

[Guest Ed Walker]

Please clarify: Did you mean "and loses" or "or loses" in the last sentence of your reply? If and what is the next step?

Thanks

[Guest Richard Scheer]

I vote for "and".

According to the terms of the Document, a mandatory 3% SHNEC contribution must be made to the Plan. In order for it to be treated as a Safe Harbor contribution, it should have been made by 12/31/03. The contribution must still be made (must follow the terms of the document and notice which was given to the participants), but since the contribution is late, the Plan no longer gets a "free ride" on the ADP test.

[Archimage]

Yes, I did mean "and".

[Guest philc]

Since the plan wouldn't be cosidered a safe harbor plan for the 2002 PY but the plan still requires the employer to make the 3% contributuion, I assume that contribution would be subject to the vesting schedule and distribution restrictions applied to other "non-safe harbor" contributions in the plan?

[Guest lucylucy]

The participants would still be 100% vested in the shnec. You would have already informed the participants in the notice that they would be 100% vested in the safeharbor contribution.

[TBob]

Since we are talking about this in 2004 for the 2002 plan year, the contribution is non-deductible and subject to the excise tax. Correct?

[Guest philc]

Lucylucy - Granted the Notice says they are 100% vested, but it also says the plan is safe harbor. If the plan and employer contribution for a plan year isn't safe harbor either because the contribution isn't made in time (as in this post) or maybe because the plan isn't adopted before the plan year it is supposed to be safe harbor, does the Notice override the plan document? Are you saying the employer contribution would be treated as safe harbor but the plan wouldn't (i.e. subject to testing)?

[Guest Boilerburm]

philc -

I agree with what LucyLucy is saying. The document (and the Notice) has stated that the employer will put in the SHNEC, and the document states that it is a fully vested contribution. All of the safe-harbor documents that I have read indicate that the SHNEC will be made, and they state that this contribution is fully vested.

TBob's question is a good one - I believe that you are correct in that it cannot be taken as a deduction for 2002 because it wasn't in by the due date of the return. But why would it be subject to an excise tax?

[Guest Ed Walker]

So, I believe we all agree the 3% must be made, but I understand this does not solve the adp test as it was not made on time.

In other words, a QNEC will still need to be made for 2002 to make the plan pass the ADP test which was not satisified bya timely Safe Harbor contribution because it is too late to return dollars to the HCE.

The application of the late funding penality has been raised. As a profit shaing plan is this applicable?

Thanks again to all.

[Guest Ed Walker]

Related questions:

When we redo the 2002 5500 does the safe harbor and QNEC for 2002 continue to show on the 2002 5500 even though not paid until after December 2003?

I plan, in redoing the participant's 2002 statements, to show the safe harbor and QNEC. Any comments?

The 415 limit for 2003 will be limited by the make up contributions for 2002, correct?