Profit sharing contribution covered by a Board Resolution?

[Guest Fred Maynard]

A non-standard prototype provides for discretionary profit sharing contributions by the Plan Sponsor without providing any specific formula. The Plan Sponsor wishes to make a contribution based on a special formula just to be used for 2004, involving an end-of-year requrement.

Can this be done via board resolution? What is the take out there?

[Blinky the 3-eyed Fish]

A non-standard prototype provides for discretionary profit sharing contributions by the Plan Sponsor without providing any specific formula.

That's just not possible. Not having a specific formula means you don't have a definitely determinable benefit and an invalid plan. Are you saying the formula question just wasn't completed in the adoption agreement?

[QDROphile]

Perhaps there is no formula or other instruction for determining the amount of the contribution but there is a formula for allocation of the amount once it is determined.

How the amount of discretionary contribution is arrived at is a matter of plan terms, and if the plan is silent, then a matter of corporate governance.

[mbozek]

I thought that the definitely determinable benefit rule was satisfied when the er determined/allocated the amount of the contribution e.g., 5% of covererd comp to 205k. For example, discretionary PS plans for for self employed persons dont require a formula and the owner makes a contribution to the plan by the date for filing the tax return which complies with RR 76-28.

[Blinky the 3-eyed Fish]

I took the original post to mean there was no formula for the allocation, but he could have just meant no formula for the amount to be contributed. Of course no formula for the amount is very common and doesn't need a board resolution, so I guess we will see what was meant.

[Lame Duck]

I think the determination of the contribution amount can be discretionary, but the allocation of the contribution must be made pursuant to a definite, predetermined formula.

[mbozek]

LD- there are many PS plans for self employed persons that do not require a definite predetermined formulas. The owner just writes a check for the contribution that is claimed as a deduction. Requiring a predetermined formulas in a PS plan is quite silly since an er can establish a plan with a formula of 0% and contribute a different amount.

[KJohnson]

A ps plan does have to have a definite formula. For a self-employed person it probably just a comp to comp fomula and if there is only one person you can then contribute whatever you want keeping in mind the 415 and 404 limits.

This is from 1.401-1--(note the word "pre-determined")

(ii) In the case of a profit-sharing plan, to enable employees or their beneficiaries to participate in the profits of the employer's trade or business, or in the profits of an affiliated employer who is entitled to deduct his contributions to the plan under section 404(a)(3)(B), pursuant to a definite formula for allocating the contributions and for distributing the funds accumulated under the plan (see paragraph (b)(1)(ii) of this section);

********

ii) A profit-sharing plan is a plan established and maintained by

an employer to provide for the participation in his profits by his employees or their beneficiaries. The plan must provide a definite predetermined formula for allocating the contributions made to the plan among the participants and for distributing the funds accumulated under the plan after a fixed number of years, the attainment of a stated age, or upon the prior occurrence of some event such as layoff, illness, disability, retirement, death, or severance of employment. A formula for allocating the contributions among the participants is definite if, for example, it provides for an allocation in proportion to the basic compensation of each participant. A plan (whether or not it contains a definite predetermined formula for determining the profits to be shared with the employees) does not qualify under section 401(a) if the contributions to the plan are made at such times or in such amounts that the plan in operation discriminates in favor of officers, shareholders, persons whose principal duties consist in supervising the work of other employees, or highly compensated employees. For the rules with respect to discrimination, see Sec. Sec. 1.401-3 and 1.401-4. A profit-sharing plan within the meaning of section 401 is primarily a plan of deferred compensation, but the amounts allocated to the account of a participant may be used to provide for him or his family incidental life or accident or health insurance.

[mbozek]

There is a difference between what the regs require and what has been approved. There are many IRS approved PS plans including ptypes, that do not require any predetermined formulas, eg. HR10 plans where there is only an owner. It is also contradictory to RR 76-28 which allows a deduction without a written affirmation of how the contribution is allocated. It is oxmornic to require a predetermined formula for a plan where contributions are discretionary on a yearly basis other to have than a 0% contribution formula.

[KJohnson]

There is a difference between what the regs require and what has been approved.

I would say that there is a difference between what the regs require and what a reviewer has caught in issuing a determination or opinion letter. I don't know of any exemption from the definite formula requirements for a Keogh and a Keogh is subject to all of the requirements of other qualified plans. Twenty-three years after TEFRA I don't even hear that many people talking about Keogh's since the term doesn't have all that much current meaning.

The definite formula is one area where a lot depends on the reviewer. I know for a matching formula, some were fixated on this notion while others were not. A good number of aproved plans also have a discretionary match formula which may not pass muster as a pre-determined definite formula.

[Blinky the 3-eyed Fish]

Mbozek, can you copy and paste the part of RR 76-28 which supports your position? It wasn't apparent to me. I am also not sure why it's oxmornic (sic) to require an allocation formula in a sole proprietor's plan. It doesn't require a contribution to be made any differently and it covers all situations in case other employees become eligible. Would you too argue that TH language should not be required or any other provisions that may not apply to the current situation? The IRS would disagree.

KJohnson is right on the money IMO.

[mbozek]

RR 76-28 " A payment made after the close of a taxable year.. shall be considered to be on account of the preceeding taxable year if... (b) either of the following conditions are satisfied ... (2) the employer claims such payment as a deduction on his tax return for such preceeding taxable year"

Requiring an allocation formula in a discretionay HR-10 plan is silly because the Self Eemplyer Person is the only person covered by the plan, contributions are discretionary, there are no corporate formalities to be observed and the allocation is determined when the contribution is made. I know of several PS plans approved by the IRS with discretionary contributions which describe the formula as a nondiscriminatory allocation among the plan participants as determined by the plan sponsor.

The requirement of an allocation formual in a discretionary PS plan can be met by the formality of having a contribution rate of 1% which can be changed at any time by amendment. The allocation is pre determined and can be changed by amendment.

[KJohnson]

The requirement of an allocation formual in a discretionary PS plan can be met by the formality of having a contribution rate of 1% which can be changed at any time by amendment. The allocation is pre determined and can be changed by amendment

Many, including the IRS, woudl say that you cannot modify an exisitng allocation formula after someone has satisfied the criteria for the allocation (employment at the end of the plan year etc.) pursuant to TAM 9735001. I know you take a different view of the TAM. .

http://benefitslink.com/boards/index.php?s...=0entry108423

http://benefitslink.com/boards/index.php?s...opic=25607&st=0

Also there could be distinctions betweent "adding" a formula as opposed to modifying a formula

[Blinky the 3-eyed Fish]

Mbozek, I still don't follow how that cite supports not having an allocation formula in the plan. Also, you have to be playing devil's advocate. Disregarding the TAM issue, you really can't think it's easier to do an amendment (potentially each year?) versus just having a viable contribution allocation formula in the first place.

I forgot about Gregory though. Ah, the memories of moxy....

[mbozek]

That position is abolutely ridiculous for an HR-10 plan with only 1 participant who doesnt know until the tax return is filed how much he can afford as a contribution and has 9 1/2 months to determine the amount of the contribution. Have you advised a self employed person that they must have a definite allocation formula in their discretionary PS plan and cant change it after year end when they know how much their income is? The TAM prohibited a reducton of amounts to participant's accounts because of a change in the allocaton formula after year end which is different than making a contribution after year end which does not reduce any allocation that is required under the plan as of year end. In other words an HR-10 plan can have an allocation formula for its sole participant that will credit contributions made after year end as a allocation as of year end . The owner would have the discretion not to make such a contribution.

[KJohnson]

I don't understand your problem. All you need is a comp to comp forumla

The Employer’s contribution for the Plan Year, if any, will be allocated to each Participant in the same proportion that the Compensation of each such Participant for the Plan Year bears to the total Compensation of all Participants for the Plan Year.

If you only have one participant, then you can put in whatever you want and you have the requisite predetermined formula.

[jquazza]

I think what mbozek is saying is if you have a one man plan, you don't need a formula for the allocation of the contribution. Well, why would you? Who else is going to share that contribution?

Any other plans, you need an allocation formula that predetermines how the contribution will be allocated amongst all the participants (comp-to-comp, flat-dollar etc..) The contribution doesn't have to be predetermined.

[Guest Pensions in Paradise]

I think we can all agree that for one-man plans, there are a lot of plan provisions which don't necessarily apply because the plan only covers one person. However, the Code and Regs don't make an exception for one-man plans. All plans must have a definitely determinable allocation formula. Period. End of story.

[Bird]

I have to think that someone has their dates mixed up and thinks that it's April 1.

All plans must have a definitely determinable allocation formula. Period. End of story.

Amen. Even in a one-man plan, you must have a mechanism for allocating the contribution to that one person.

[Guest Ned Ryerson]

That position is abolutely ridiculous for an HR-10 plan with only 1 participant who doesnt know until the tax return is filed how much he can afford as a contribution and has 9 1/2 months to determine the amount of the contribution.

So Mbozek, do you now realize you are misunderstanding the issue?

[AndyH]

Ned, stop wasting Harwood's time!