Deduction of Late Safe Harbor Contribution

[JButtrick]

We have a situation where the employer distributed a timely 3% Safe Harbor notice prior to the beginning of the 2006 calendar plan year and then forgot he had made the committment. He made no contribution for the year and filed his taxes without an extension and then responded to our year end data request indicating that he had made no contribution.

I believe that having distributed the notice, he is obliged to make the contribution.

The issue of the deduction is a question. Apparently his accountant is not up to speed on qualified plan deduction issues.

Question 1: If the contribution is an obligation by virtue of the issuance of the SH notice, is there there any impact on the rule that the deposit must be made prior to the tax filing deadline (including extensions).

Question 2: If it's too late to make the contribution and deduct it for 2006, can it be deducted for 2007 as long as the total 2007 deduction remains under 25% of 2007 compensation. He also distributed a 2007 3% notice, so under this scenario he would be looking at deducting something like 6% for 2007

The issue seems somewhat similar to a DB plan subject to minimum funding, but the deductibility of DB contributions is specifically addressed in the rules, whereas I have been unable to find anything that deals with this situation.

I would like to be able to point the accounatant to some guidance if any exists

[Belgarath]

The default rule under IRC 404(a)(1)(A) is that the contribution is deductible for the fiscal year when paid. IRC 404(a)(6) allows a special "dispensation" to deduct for the prior year if certain conditions are met, which they have not in this situation. So yes, I agree that there should not be a problem deucting for 2007.

[Jim Chad]

Did anyone terminate employment?

Will there be a 415 problem?

[401_4_ever]

It may be deductible under another section of the tax code, and not just 404 as well....

[Guest mjb]

404 you care to explain the basis for your statement. IRC 404(a) states that deductions to a qualified plan are only deductible under IRC 404, if they are otherwise deductible.

[Tom Poje]

actally, what does the document say? you have to follow the terms of the document. if there is no safe harbor language - then what happens?

I don't think the IRS has addressed that issue of issuing a notice but having no 'plan' behind it.

if the document contains safe harbor language then yes you have the obligation - regardless of whether a notice was issued or not. the IRS has made that clear - in that particular case the IRS has said it is probably a moot point in the case of a SHNEC - though you still have a failure to follow the terms of the document and issue a notice.