Late MP and PSP contributions - operational failure?

[Guest KoreAmBear]

There are only two participants in paired MP and PS plan. The Plan Sponsor has been short on its MP (10%) PSP (15% discretionary but traditionally always awarded since 2000) since 2000. The Plan Sponsor now wants to make all its contributions as well as return the lost earnings to the master trust. Can we just correct without submitting this as a qualification failure? Thanks in advance!

[saabraa]

There is no qualification failure. You may need to file form 5330 and pay excise tax on the funding deficiency. You must repay money purchase plan, including interest. If you are past the deduction deadline for the psp, there's no going back to contribute for that year.

[Guest KoreAmBear]

There is no qualification failure. You may need to file form 5330 and pay excise tax on the funding deficiency. You must repay money purchase plan, including interest. If you are past the deduction deadline for the psp, there's no going back to contribute for that year.

Thank you! Can you give me some authority that these late contributions are not operational failures? Rev. Proc. 2003-44 doesn't specifically say either way although its definition of an operational failure (which is in of itself a qualification failure) seems really broad (if you are not following the Plan Document). I really appreciate it.

[saabraa]

The correction process deals with qualification issues. To impact the qualified status of a plan, there has to be a violation of section 401(a) of the Internal Revenue code. The excise tax issues found on the Form 5330 do not link to 401(a). Somewhere in Rev Proc 2003-44 it'll say essentially the same thing.

For your funding situation, section 4971 and its regulations tell you the tax kicks in when you've gone beyond 8 1/2 months past the end of the plan year, and the plan is underfunded. Maybe you should get rid of the money purchase plan like many others have done, now that psp allows 25% contribution.

[Guest B2Randolph]

VCP is always the best option if the client needs a guarantee. Besides, the fee for this plan is so minimal, unless VCP preparation is really expensive, it seems like a win-win situation to me.

However, VCP may not be the only option. I doubt this could be considered insignificant for self correction, but if you are fixing it within 2 years you could still do self correction even if significant.

Good luck with it whatever you choose.

[Guest mjb]

Since this a contribution issue not a qualfication issue there is no reason to submit under VCP. Best recourse is to file 5330 and pay taxes for late MP contributions and merge MP into PS so that there will be no further penalties since late PS contributions are not subject to 4971 penalty. Only restriction on funding PS plan is that deduction is limited to 25% of covered comp.