Top-heavy defined contribution minimums

[lexi]

if a calendar year plan is top heavy for 2007, does the ER have until 12.31.2007 to make 3% match?

Specifically, how does a top heavy ER make contributions to satisfy the 3% DC minimum?

1.416-1 says that all participants as of the last day of the plan year are entitled to receive the top-heavy contribution. so can one interpret that to mean that the top-heavy contribution doesn't have to be made until the last day of the plan year?

thanks in advance for your help.

[Jim Chad]

I want to make sure we are on the same page. So let me paraphrase your situation and you tell me if I am wrong anywhere.

Calendar year plan

The Top heavy percentage calulated for 12-31-06 is over 60%, so you are top heavy for 2007.

This requires a contribution of 3% to all non key employees unless no key employee recieved 3%. In this case the TH miinimum contribution is equal to the highest % any key received.

Now as for timing: it is a contribution for the 2007 plan year and should meet the usual rules for deductibility. This means it is due by the due date fo the company 2007 tax return, counting extensions. If this is a Corp., it is due March 15, 2008 plus extensions.

[lexi]

Jim:

Your summary of facts is right on.

But how do you KNOW all of this stuff? Am I not seeing it in the Regs somehow?

[Jim Chad]

Perhaps I can be more helpful if I knew where you were coming from.

Are you an accountant, human resources, investments, third party adminstration, other?

[lexi]

neophyte ERISA attn'y.

[rlb64]

It's my understanding that timing would be tax return due date if the employer wants it deductible for the tax year that corresponds with the plan year. However, if the employer misses the deadline, the contribution could still be made and be in compliance as long as 415 limits aren't violated. It's just that it's deductible in the next tax year.

[Jim Chad]

I was going on Section 404 being the earliest deadline. Most clients want the deduction as soon as possible and usually the accountant puts it on the tax return for the earliest year.

But RLB64 is correct. section 415 is the end of the year.

Question: Can anyone remember a deadline that is 30 days after the 404 limit? I think I remember some rule from many years ago. Is it gone or am I just wrong?

[Mike Preston]

It is still there.

[Guest bruss]

I have been following this thread and have a follow-up question for you.

I have a client that is required to make a top-heavy 3% for 2007 ( top heavy at end of 2006)

Both client ( cash basis S Corp) and plan are calendar year.

If they do NOT want the deduction on the 2007 tax return, can they take it as a deduction on the 2008 return ( including it in the 415 limit etc)

And would the deadline for making the contribution be by the end of 2008 ( 12/31/08)?

Thanks!

[Mike Preston]

DC contributions are generally deductible in the taxable year when they are made. That is the default. Hence, if you make a contribution for the 2007 year sometime in 2008, the default is that it is deductible in 2008. There is a section of the IRC that allows a contribution made within a certain period of time after the end of the fiscal year to be deductible notwithstanding the fact that the amount was contributed after the end of the fiscal year. See 404(a)(6).

The fact is that most employers want to take advantage of 404(a)(6) and deduct the amount contributed after the end of the year not in the year when it is actually contributed, but the prior year.

But one doesn't have to take advantage of 404(a)(6).

So you are free to deduct a contribution for 2007 in 2008 if it is actually made in 2008.

You mention 415 and that is a completely different discussion. In general, as long as the contribution for 2007 is made before the date which is 30 days after the due date for the 2007 tax return, then the amounts allocated in the 2007 plan year (actually, limitation year, but they are frequently the same) are treated as annual additions for 2007 even if they are deducted on the 2008 tax return.

Hope this helps.

[Guest bruss]

DC contributions are generally deductible in the taxable year when they are made. That is the default. Hence, if you make a contribution for the 2007 year sometime in 2008, the default is that it is deductible in 2008. There is a section of the IRC that allows a contribution made within a certain period of time after the end of the fiscal year to be deductible notwithstanding the fact that the amount was contributed after the end of the fiscal year. See 404(a)(6).

The fact is that most employers want to take advantage of 404(a)(6) and deduct the amount contributed after the end of the year not in the year when it is actually contributed, but the prior year.

But one doesn't have to take advantage of 404(a)(6).

So you are free to deduct a contribution for 2007 in 2008 if it is actually made in 2008.

You mention 415 and that is a completely different discussion. In general, as long as the contribution for 2007 is made before the date which is 30 days after the due date for the 2007 tax return, then the amounts allocated in the 2007 plan year (actually, limitation year, but they are frequently the same) are treated as annual additions for 2007 even if they are deducted on the 2008 tax return.

Hope this helps.

[Guest bruss]

Thanks, that's exactly what I needed to know.

I don't know why the third party administrator wouldn't answer my questions, they were very vague as if I was asking about doing something illegal. I guess it's just unusual.

Appreciate your help and sorry about the duplicate posting, I don't use this board often enough to follow the instructions!

[Mike Preston]

No problem on the duplicate posting. It is highly likely that the TPA was just concerned you were going to ask the unanswerable question, which is: **when** is a contribution for top-heavy really due? Nobody really knows. Honest. There is not one definitive piece of guidance on this isse and the top-heavy regs were issued in 1984!

The conservative approach is to contribute it before the date which is 30 days after the due date of the tax return, so that you can be sure it is treated as an annual addition for the prior year (bad things happen when you have to give a 3% contribution to a terminated employee with no compensation in the current year - the plan is disqualified!). If they convince you that the 2007 contribution must be made before the due date of the 2007 tax return, they have ensured that you won't accidentally contribute too little and be forced into a 415 violation. Just guesswork, of course.

[Belgarath]

I don't see this as necessarily quite as awful as one might originally think, provided that it is a one-time thing. I'd say that this could be corrected as a "significant" error under SCP in Revenue Procedure 2006-27. And you would allocate it for the proper plan year under that correction. Appendix A specifically lists a top heavy failure.

However, I heartily endorse not ever getting to this stage! While I doubt that the Service would ever list a one-time thing like this as an "egregious" error, they nevertheless reserve that right, and then you start looking at fees/sanctions.

[Guest mjb]

The timing of the contributions for deduction purposes discussed above is stated in Rev. Rul 76-28. The rules are also stated in IRS pub 560 at about p 13. In a calendar year plan a contribution can always be deducted for the tax year in which it is made. Since profit sharing plans are exempt from the funding requirements of ERISA there is no specific deadline for making a TH contribution to the plan. However, some plans have provisions that require TH contributions must be made by a specfic date, e.g., date for filing the tax return. Need to check plan document.

[Mike Preston]

OK, I'll bite. Let's say the document doesn't provide any guidance on this point. The 2007 year is top-heavy and the plan sponsor wishes to postpone, as long as possible, the required 3% contribution. Your words indicate that the plan sponsor may delay the 3% contribution until.....? When, exactly?

[BG5150]

Usually, the TH contribution is made AFTER the plan year in question since: a) only eligible participants at the end of the year get the contribution and b) you use FULL year compensation to determine the 3%.

Also, in the original post, it is mentioned that a 3% match might be used for the TH minimum. That would be okay if every eligible person deferred. But how many plans have 100% participation? You would have to give some sort of ER contribution to those who aren't deferring. (Unless, of course, this is a Safe Harbor plan that uses SH Match and no other ER contribs...)

[Guest mjb]

OK, I'll bite. Let's say the document doesn't provide any guidance on this point. The 2007 year is top-heavy and the plan sponsor wishes to postpone, as long as possible, the required 3% contribution. Your words indicate that the plan sponsor may delay the 3% contribution until.....? When, exactly?

When is an employer required to make any contribution to a PS plan?

[austin3515]

Far as I know (outside of the document) there are the following deadlines for er contributions AND NO OTHERS:

404: due date of business tax return, including extensions (assumign deduction is in prior year).

415: 30 days after the 404 date.

QNEC's in ADP/ACP: Last day of following plan year.

So what's missing?

416 (top heavy)

AND 401(a)(4)!!

But perhaps, the lack of specificity works to our advantage - for example, if profit sharing is not made by due date for business return we have deduction problem, maybe a 415 problem, but perhaps not a 416 or 401(a)(4) problem. Not that its much consolation...

[dmwe]

Lexi,

In response to your question about "How do you know all this stuff?", I'd suggest you get a copy of Sal Tripodi's manuals for retirement plans. Everything you'd ever want to know about qualified plans is in this 5 volume set. Plus they are updated each year for current legislation.

His company is TRI Pension Services, or I think you can order them through ASPPA website. It's the bible of the business.

[HarleyBabe]

Definitely, Sal's books. At the very least, I can always quickly find the code and reg for my issue through those books.