Employer Contribution

[Guest 401kadmin]

A client did not deposit their 2004 discretionary contribution, they have amended their 2004 corp return to reflect no pension deduction for that year. Can they take the deduction in 2005 even though the allocation is based on 2004 compensation?

[Guest mjb]

See rev rule 76-28 for yr in which deduction can be claimed for tax deduction. Deduction can be taken for tax yr in which contribution is made or for prior tax yr if contribution is made no later than date for filing tax return w/ extensions. Year in which employees are paid comp is not relevant.

[austin3515]

Ahh, but often the most important question is the one that is not asked. Such is the case here! While everything 401kadmin has said is true, what he did not mention is that you are basically guaranteed a 415 violation, as for 415 limitations, this contribution is NOT a 2004 contribution - that would have been due 30 days after the extended due date of the tax return. Since that date has come and gone, this is a 2005 contribuion for 415 purposes. So for example, if any terminated participants have zero or little comp in 2005, any contriubtion could cause a 415 violation.\

Not sure how this impacts nondiscrimination testing, but check that out too!

Plus, how could you prove that the contribution is really for 2004, and not 2005? The timing of deposit in the Plan Document has likely already passed.

[BG5150]

Can't the employer jsut "call" it an '04 contribution and pay excise tax on the non-deductible contribution?

[Guest mjb]

I dont follow your reasoning. Under IRC 404(a)(5) the amount is deemed contributed in the yr the contribution is made to the plan (e.g the contribution is not deemed made to the plan in the year the liability to make a contribution accrued (2004.) The contribution is deducted only in the year it is made or in the following yr if made by the date for filing the income tax return and claimed on the return (RR 76-28). If the amount contributed in the tax yr exceeds the amount which can be deducted under 404(a) then the 10% excise tax applies to the contribution made in that yr. It cannot be deemed made in the year for which the liability accrued.

[GBurns]

mjb

I am not following your reasoning, so please help by explaining further.

We are now in 2006.

The liability was incurred/accrued in 2004.

That contribution was not made in either 2004 or 2005 and not yet in 2006.

The deadline for 2005 has passed and so has 2006.

You also agreed that "It cannot be deemed made in the year for which the liability accrued." Which would be 2004.

You also stated "..the amount is deemed contributed in the yr the contribution is made to the plan." However, the OP stated that no contribution was or has been made as yet.

So, how can the contribution be made and when and where deducted etc?

[Guest mjb]

See rev rule 76-28 for yr in which deduction can be claimed for tax deduction. Deduction can be taken for tax yr in which contribution is made or for prior tax yr if contribution is made no later than date for filing tax return w/ extensions. Year in which employees are paid comp is not relevant.

GB:

Q1 what part of deduction in the yr of contribution or prior tax yr dont you understand? Hint: contribution is deductible in employer tax year in which it is made or for prior tax yr if made no later than the end of 6 mo extension for filing employer tax return (if extension is filed).

Q2 why do you conclude that the deadline for contributions in 2005 or 06 tax yr passed under Rev rul 76-28?

Q3 if no contribution has been made is there a deduction?

[Guest 401kadmin]

Would there be any issue with the DOL for not making the 2004 discretionary employer contribution when participants received a Benefit Statement that an employer contribution would be made?

[GBurns]

Re: Q1: The contribution has to have been made for "contribution is deductible in employer tax year in which it is made or for prior tax yr..." to be applicable. No contribution has been made, hence my questions.

You have only repeated the vague generalizations but still have not stated how the contribution is to be treated such as on what year's tax return the deduction should be taken, or even if a deduction can be taken at all.

As per the OP the particular years in question are 2004 and 2005 "Can they take the deduction in 2005 even though the allocation is based on 2004 compensation?"

[Archimage]

Maybe this thread will help.

http://benefitslink.com/boards/index.php?s...c=32975&hl=

[Guest mjb]

Re: Q1: The contribution has to have been made for "contribution is deductible in employer tax year in which it is made or for prior tax yr..." to be applicable. No contribution has been made, hence my questions.

GB: no contributon=0 deduction

You have only repeated the vague generalizations but still have not stated how the contribution is to be treated such as on what year's tax return the deduction should be taken, or even if a deduction can be taken at all.

GB: The generalizations you refer to are the principles that govern the year of deduction under IRC 404(a)(6) as stated in RR76-28.The specific facts of when the contribution is made determines the tax year in which the deduction is taken. Since my explaination is not precise enough for you see IRS pub 560 @ P13.

As per the OP the particular years in question are 2004 and 2005 "Can they take the deduction in 2005 even though the allocation is based on 2004 compensation?"

GB: See my 8/28/06 post @10:14 for answer

401kadmin: yes there could be but the solution is make the contributions with interest.

[austin3515]

Does everyone agree on what comp is used for nondiscrimination testing? Isn't that the more important question? I'm not sure 2004 pay can be used to test it. If someone else knows for sure, I'd be curious.

[Bird]

Does everyone agree on what comp is used for nondiscrimination testing? Isn't that the more important question? I'm not sure 2004 pay can be used to test it. If someone else knows for sure, I'd be curious.

That's a good question, and I think your earlier comments were even better, because they tend to lead one to the correct conclusion - the 2004 contribution was discretionary, it wasn't made, and it's too late to make it now. Some things you can't fix. The benefit statements should be re-done.