Prefunding a PS contribution

[Guest chris4013]

Is there any issue with an employer depositing $3,000 to the suspense account in 2004, planning to allocate the monies for the 12/31/06 plan year?

I presume this is acceptable but he/she can not take the deduction until 2006, and is counted as a liability on the form 5500 until allocated, correct?

Thank you

[MWeddell]

The IRS believes that one cannot have a suspense account unless it is authorized by law. However, I don't know of any basis for that belief in the regulations except when there is a plan merger or spin-off.

[Guest mjb]

I dont understand how a deduction can be taken in 2006 when all contributions to a plan are made on a cash basis. Under Rev. Rul 76-28 contributions are deductible in the employer tax year they are made or for the prior tax year if made no later than the date for filing the income tax return with extensions. Therefore, the contributions can be deducted to the extent permitted under IRC 404 in either 2004 or 05. The deduction is not dependent on when the contributions are allocated to participant's accounts or credited as a liability on the 5500 form.

[Guest chris4013]

So pursuant to your response, you would deduct the prefunded amount and report on the 5500 as well?

Would you show the contribution to a suspense participant on an allocation report to reconcile to the 5500, then show a reallocation from suspense in the subsequent year?

[Guest mjb]

I am not an accountant and do not prepare 5500 forms. The accounting rules for crediting contributions on 5500s may be different from the IRC provisions for deducting plan contributions.

[Guest Pensions in Paradise]

Chris - what did the employer do? Did they make a nondeductable contribution in 2004, and you want to allocate it in 2006? Contributions to the plan have to be allocated in the manner and timeframe outlined in the document.

[Dave Baker]

Yow, couldn't this contribution disqualify the plan? The IRS doesn't want money invested in a tax-free trust any sooner than the Code allows... excessive contributions mean foregone tax revenue on recognized investment earnings. That's why section 415 is such a big deal, and why the 415 regulations are so explicit about the kinds of circumstances that permit the use of a suspense account (unallocated contributions effectively avoid the 415 limit). If you overcontribute because of a reasonable error in estimating someone's compensation for the remainder of the year, for example, you're OK under the 415 regulations -- if the plan document takes advantage of them. (I forget whether an incorporation by reference is permitted or whether the document has to spell out the suspense account procedures for such an overcontribution.) But the burden would be on the plan sponsor to show that the error was a reasonable one... if the plan sponsor knew or should have known that a particular participant's compensation wouldn't justify the funding being made on account of the rest of the plan year, that's taking illegal advantage of the trust as a tax shelter on the recognized investment earnings on the excess contribution and the trust's tax-exempt status goes KA-BOOM.

I think.

[AndyH]

Both of the last two responses make terrific points.