Failure to Deposit Profit Sharing Contribution

[Guest Hartnett123]

Where can I locate information on the implications of failure to deposit a profit sharing contribution? I have tried every search keyword possible!

Not 401(k) contributions (of which there is plenty, easy to access information . . .).

The employer failed to make a final deposit of the profit sharing contribution for the plan year ending February 28, 2003. The deposit should have gone in no later than May 15, 2003 (no extension). We are just now discovering that the deposit was not made.

Clearly the money must go to the plan, the employer included it with their tax deduction for 2002, but should there also be a penalty and a filing of some sort with the IRS?

Can someone point me in the right direction?

Thanks.

[Archimage]

I am assuming the profit sharing contribution is discretionary. Since it was not made by the due date of the tax return, it cannot be funded for the year they intended it for. The company should amend its tax return.

[Guest FormsRmylife]

But, if there is a board resolution that has been adopted directing a particular contribution; then, depending upon state law, the employer is obligated to make the contribution. Corrective interest may also be due. Deductibility is an issue. It is too late for 2003, so the tax return must be amended. If deducted in 2004, there may be no room for a 2004 plan year contribution to be deducted.

Consult an attorney re effect of any board resolution and need to seek IRS ruling.

[Archimage]

I disagree (on the federal level anyway. No knowledge of state law). A discretionary contribution is just that. A discretionary contribution can be made, reduced or eliminated at the discretion of the employer. The plan document will probably not require a board resolution for the contribution. Many documents also state that the contribution for the given plan year has to be made by the due date of the tax return.

[Guest Hartnett123]

THE SOLUTION:

I delved and delved, and then I called our regional compliance coordinator to make sure I had covered all bases. This is the solution:

1. (Thankfully) the plan document did not permit the option for an employee to elect out of the plan, so we have an operational error.

2. The 2002 fiscal year corporate tax return is incorrect now, and must be amended.

3. The 5500 is fine. It is an informational return, and modifying this information will not have a material affect on the 5500, so amendment is not required. Just clear notes in our files.

4. The 2003 contribution is now overdue (due May 15), and it was not included in the corporate tax return anyhow, so both the 2003 and the 2002 contributions for this employee should be included in the 2004 corporate tax return.

5. Due to 415 limits, the employer will not be able to make a 25% of compensation profit sharing contribution for the 2004 fiscal year. It will have to be reduced such that the aggregate deductible contribution (which will include 2002 and 2003 for this fella) will be 25% of compensation.

6. The operational error is being corrected within 2 years and it is insignificant in amount. Therefore there are no additional voluntary compliance requirements. No excise taxes, penalties, or additional forms to be filed with the IRS.

BTW, had the document allowed for the participant to elect out of the plan, we would have had a "demographic error" rather than an operational error.

All of the above steps would have had to have been done, and in addition the plan would have had to be retroactively amended, which would also require entering into a compliance program that would cost the client an additional $750.

A demographic error involves no excise taxes.

[AndyH]

Who is "our regional compliance coordinator"? IRS? DOL? Your company?

[david rigby]

MGB

[Belgarath]

Here's my 2 cents worth - and overpriced at that, no doubt.

I agree with Archimage. I suppose that if you have a PS document that says if a board resolution is made to contribute a certain amount that that amount is then required, and it doesn't allow the employer to change that or rescind the earlier board resolution, then not contributing that amount would be an operational error. I have never seen such a document, but it certainly doesn't mean there are none. I have seen documents where the contribution is fixed - if you have profits, then a set percentage of the profit will be contributed. But in our documents and most of those I have seen, it is completely discretionary. Aside from a possible state law issue (like Archimage, about which I know nothing) or unusual document situation such as noted above, I'll never be persuaded that the contribution must be made just because there is a resolution saying they will contribute "x" dollars. Yes, tax returns must be amended, etc., but that's certainly not an insurmountable difficulty.

[AndyH]

Good one, pax.

Could of argued for Mike P also but he must be on an extended surfing excursion.