Recharacterizing 2006 Quarterly as 2005 Contribution

[Guest mingblue]

In an effort to increase my Funded Current Liability Percentage as of 1/1/2006, I'd like to use a 2006 quarterly payment made on 7/21/2006 as a 2005 contribution.

Question : Can the resulting Credit Balance be used to cover the 2nd quarterly due on 7/15 - with an appropriate late or penalty interest calculation - or does the Credit Balance have to be effectively created on or before 7/15 ??

[SoCalActuary]

Your treatment has merit.

In either case, the 7/15 payment is late.

But treatment as a 2005 payment is more advantageous, assuming it fits within the deductible limits for 2005.

Is it being deducted for 2005? Does the employer intend to designate it as a 2005 payment?

If not, then you really don't get to use it as 2005, because it is not attributed to 2005 by the plan sponsor.

[ubermax]

In my case the late quarterly penalty rate for 2006 is 7.9% and my funding or valuation rate is 8% and so there wouldn't be any penalty interest for the late payment.

My question is more one of timing - the Credit Balance at the end of 2005 is $0 without recharacterizing 2006 payments as 2005 - quarterly payments of $X for 2006 are made on 4/13 and 7/21 - if both are used for 2005 then the Credit Balance is 2X on 12/31/2005 and the 1/1/2006 FCLP is 90% - a good thing for this client !!!

The question in my mind becomes : Is the 2nd quarterly payment obligation satisfied given that the Credit Balance to cover it isn't effectively created until 6 days after the due date ?

[david rigby]

Is the 2nd quarterly payment obligation satisfied given that the Credit Balance to cover it isn't effectively created until 6 days after the due date ?

No. More specifically, it is not satisfied by the due date.

[Guest mingblue]

Why can't it be viewed as being satisfied late on 7/21 with a necessary late charge (=$0) ; I agree that in order for the 2nd quarterly to be counted in the Credit Balance and be made timely it should be received on or before 7/15 ; but Notice 89-52 Q/A 12 merely says " Contributions for the prior plan year will not be reflected in the determination of any credit balance until they are actually contributed to the plan ".

[SoCalActuary]

"Satisfied late" = not satisfied by the due date

Where a notice is due for a late deposit, you should make sure it is issued.

[AndyH]

What is the concern about a quarterly being 6 days late? It is not reportable as such to either the participants or the PBGC, it appears to me, except for maybe the ERISA notice (is there a 30 day exemption-I don't remember) which has no known due date.

But, for whatever it is worth, 7/21 is not 7/15.

p.s. is 7/15 the extended tax return due date maybe?

[Guest mingblue]

maybe there's some confusion regards the original question - some practitioners read Notice 89-52 to say that for a Credit Balance or any portion thereof to be used to cover a quarterly it has to be real before the quarterly is due ; other practitioners say that a Credit Balance that becomes real after a quarterly due date can also be used but a late interest calculation will have to be performed.

Notices aren't the issue - there's a grace period anyway !!!!

I'm just trying to poll a bigger available group - thanks for your comments !!

[AndyH]

I thought the Notice was clear on that issue. I don't know anybody who would consider it useable if there is a receivable exceeding the amount in question.

[Guest mingblue]

I'm sorry Andy but I don't think you understand the question !!!!! BTW are you an actuary ???

[AndyH]

Obviously I am incapable of approaching your thought level and will desist from further efforts.

Do you work for a MA based insurance company? If so, the world is much, much smaller than you know.

[Guest mingblue]

really Andy !! enlighten me !!

[SoCalActuary]

Don - I'm trying to understand the issue here.

The facts you present are that the first two payments are being credited to the prior year, creating an FSA

balance as of 1/1/06, and incidentally increasing your funded ratio.

Then you bring up the 2006 quarterly requirement. From your data supplied, it appears that you get to

use the April payment for the first quarterly installment, since it was a part of the FSA balance before the

due date. The second quarterly installment is late by 6 days, so you have an interest calculation. The FSA balance attributed to contributions by 7/15 did not include the 7/21 payment.

What else is left on this issue?

[david rigby]

Remember that late is late, even if the interest penalty is zero.

[Guest Texas_Acty]

In an effort to increase my Funded Current Liability Percentage as of 1/1/2006, I'd like to use a 2006 quarterly payment made on 7/21/2006 as a 2005 contribution.

Question : Can the resulting Credit Balance be used to cover the 2nd quarterly due on 7/15 - with an appropriate late or penalty interest calculation

No and no.

- or does the Credit Balance have to be effectively created on or before 7/15 ??

Yes.

[AndyH]

This "poll" seems to be unanimous, Don.

[Guest mingblue]

I agree that a Credit Balance has to be "real" before 7/15 in order for it to timely cover a quarterly due on 7/15 - emphasis on timely - since the 7/21 contribution was made before 9/15 it does count in the beginning of year Credit Balance - and per 89-52 , Credit Balances can be used to cover a quarterly - and this is the case here - the quarterly is covered - it's covered late but it's covered - and there's no interest penalty because of the specific rates involved - and 6 days late is within the 30day? maybe it's 60 ? grace period.

Q/A 12 of Notice 89-52 sort of addresses this situation - but it seems like it's talking about the situation where a Credit Balance has to be real before a due date to timely ( again timely) satisfy the quarterly obligation.

I don't want to dwell on this question but I think the logic has merit - we're split on it in our shop and so I threw it out here.

And Andy I apologize if I sounded harsh - but it sounded to me from your response that you were trivializing my question.

Let's move on !!!! and thanks for all the responses and time !!!

[Effen]

I don't really see this as debatable. The quarterly is clearly late because the credit balance didn't exist on 7/15. There is no grace period for interest penalties, only for notice requirements.

I agree with the other responses and see this is pretty clear. If you shop is split, I would argue you all haven't read the notice.

Q/A-12 Notice 89-52

Q-12: May an employer treat all or a portion of a credit balance in a plan's FSA as a payment of a quarterly installment?

A-12: An employer may treat all or a portion of a credit balance in a plan's FSA as a payment of a quarterly installment.

Example 5 --Assume the same facts as Example 3, except that an amount in excess of the 1988 minimum funding requirement was contributed during 1988 and that such contribution resulted in a credit balance of $10,000 on December 31, 1988. It was determined in Example 3 that the amount of the first quarterly installment due on April 15, 1989 is $6,250. At that time, the credit balance, with three and a half months' interest, equals $10,227. Even if no contribution is made by April 15, 1989, the first installment requirement is satisfied because the credit balance with interest exceeds the amount of the quarterly installment due. The amount of excess, $3,977, with three months' interest to the due date of the second installment, is $4,054 and may be used to reduce the amount required to be contributed for the second installment. Therefore, as long as $2,196 [$6,250 - $4,054] is contributed by July 15, 1989, the second installment requirement will be satisfied. The full $6,250 must be contributed for the third and fourth installments unless additional contributions are made for the 1988 plan year on or before September 15, 1989.

Contributions for the prior plan year will not be reflected in the determination of any credit balance until they are actually contributed to the plan. The intent to contribute the required amount within 81/2 months after the end of the prior plan year is not sufficient. For example, in the previous example, if no contribution for the 1988 plan year had been made by April 15, 1989, no credit balance could have been taken into account in determining the amount needed to satisfy the first installment requirement, unless the amount of credit balance as of December 31, 1987 was greater than the 1988 minimum required contribution.