Profit Sharing intended for 2005, but not yet made

[John Feldt ERPA CPC QPA]

Suppose the employer accrued a discretionary profit sharing contribution for 2005 (showing the contribution on their statements), but failed to make the contribution prior to the tax return deadline and even worse, did not deposit the contribution by 12/31/2006 for the 2005 plan year.

Can the employer still deposit and allocate the profit sharing contribution for 2005, even if they cannot deduct it. If yes (however unlikely), should they make up earnings for such a late deposit?

My thought is no, a contribution made after the end of the plan year can only be considered as made for the prior year if it is deducted under Section 404(a)(6), or is it is required by the plan document.

What do you think?

[J Simmons]

I think that since the contribution was declared, even though you're dealing with a profit sharing plan you probably have minimum funding issues under IRC 412 and the correction would be pursuant to the rules that apply under IRC 412. Declaring the contribution obligated that contribution to be made, just as if it had been required by plan provision.

[Bird]

I'd say that not making a discretionary contribution by the deadline means that there was no contribution, no matter what may have been "declared."

The actual deadline is another matter. I know it is the (extended) tax return due date for deduction purposes, I think it is 30 days after that for annual additions determination, and I think it is the end of the following year for top-heavy and safe harbor purposes (neither of which apply under the facts presented, so I don't think Dec 31 is relevant).

[david rigby]

It is difficult to see how IRC 412 would apply, after reading 412(h).

[austin3515]

-Deduction issue: No biggy, deduct it next year!

-415: As long as all of the employees are still employed (common in a small company), 415 might not be an issue anyway (i.e., their 415 limit might not be exceeded).

So that leaves basically non-discrimination and coverage. And there are NO regulations that I was able to find that indicate when a contribution must be deposited to be included in a particular plan year for non-discrimination and coverage. IF it's out there, please let me know where!!!

As an aside, many documents specify that contributions will be made by the extended due date of the federal tax return. If your document has this, J4K, then you might have an operational failure. But I'd say due to cut-back issues you'd better make the deposit (forget about employee morale!!).

[Guest mjb]

1. taxable yr for deduction of contributions is governed by Rev. Rul 76-28 which limits deductions to the later of employer tax year in which the contributions are made or the date the tax return for prior year is filed with extensions.

2. minimum funding standards do not apply to a PS plan and there is no statutory requirement for making discretionary contributions by any stipulated time. There is little authority on whether an employer can be forced to make a discretionary contribution if there is nothing in the plan document that requires a contribution to be made and if the fiduciaries do not have an obligation under the plan to collect a delinquent contribution.

3. I dont agree that contributions must be made by a date for filing the tax return because of a plan provision because discretionary contributions have no fixed date to be contributed and as noted above they are always deductible by the date for filing a tax return for a taxable yr.

4. There is also as issue of when the benefits accrue in a PS plan under the cutback rule which may not occur until the date the contributions are allocated to the participants's accounts.

5. Many employers do not have a formal procedure to award a PS allocation or to incur an obligation to make contributions to a PS plan but merely allocate funds on a specified date without any formal corporate action which makes it difficult to determine if a benefit has accrued.

[Blinky the 3-eyed Fish]

-So that leaves basically non-discrimination and coverage. And there are NO regulations that I was able to find that indicate when a contribution must be deposited to be included in a particular plan year for non-discrimination and coverage. IF it's out there, please let me know where!!!

Think of what you are testing in a DC plan - annual additons. If it's not an annual addition, it isn't in the test for the year.

[Mike Preston]

Not sure I agree with this. Presume a plan and fiscal that are the same. No extension. -11g amendment made on the last day allowable, well past the 30 day rule that would normally apply to determine whether such a contribution is treated as an annual addition for the current year.

I'm not sure what to call it, but I'm not comfortable saying that an -11g amendment in such a case is precluded.

[John Feldt ERPA CPC QPA]

Well, thanks everyone for all of the various replies.

Mike Preston, if you could expound, that would be great. "... not saying an -11g amendment is precluded" - the double negative here has me hesitating -can you provide a more revealing response?

Here's perhaps what we might consider:

1) File an amended Form 5500 for 2005 and revise the 2005 valuation (back out the receivable). Or

2) File a VCP application with the IRS. Ask to allocate a contribution made now for 2005. Or

3) Take a chance and do the contribution and the allocation. Here I would ask the client to sign a hold harmless letter because if audited, the results could be fairly icky (technical pension term).

Any comments?

[Blinky the 3-eyed Fish]

True, an -11g would be an exception. Of course that deadline has passed in the example.

[austin3515]

Blinky - I decided to go straight to the regs to prove you wrong, and there it was... evidence that you are indeed correct. I put stars around the relevant sections.

1.401(a)(4)-2 Nondiscrimination in amount of employer contributions under a defined contribution plan.

(ii) Allocations taken into account. The amounts taken into account in determining allocation rates for a plan year include all employer contributions and forfeitures that are allocated or TREATED [emphasis added] as allocated to the account of an employee under the plan for the plan year, other than amounts described in paragraph ©(2)(iii) of this section. **For this purpose, employer contributions include annual additions described in §1.415–6(b)(2)(i) (regarding amounts arising from certain transactions between the plan and the employer)**. In the case of a defined contribution plan subject to section 412, an employer contribution is taken into account in the plan year for which it is required to be contributed and allocated to employees' accounts under the plan, even if all or part of the required contribution is not actually made.

I still think this is more of an operational failure though, since it was included in participant statements.

[Dougsbpc]

Suppose you had a similar example except the plan was a 401(k), a key employee made S/R in excess of 3% of salary and therefore had a top heavy minimum requirement. What if the employer missed making the deposit by the extended tax filing deadline, but did make the deposit before the end of the next plan year end?

[austin3515]

In a word: EPCRS.

[Mike Preston]

John, is it now clear after Blinky's response? I was just trying to point out that Blinky's description, while generally accurate, needed to be expanded just a wee bit to include a contribution made pursuant to an -11g amendment, whether or not such amount is treated as an annual addition for the prior (corrected) year or not.

[John Feldt ERPA CPC QPA]

Mike: I think so, however the deadline is now too late for -11g, so it can't be included if contributed now for a 2005 calendar year plan, right?

Austin3515 and Dougsbpc: Rev Proc 2006-27 Section 7, 8, and 9, and then Appendix A, section .02

[Mike Preston]

Agreed.