First year profit share and W-2 box 13

[masteff]

My current employer has no retirement plans. We're considering using a profit share to move part of what's currently paid as annual bonus to a retirement contribution. I'm aware that the plan has to be in place before year end for the contribution to be deductible this year.

Since we have no current plan, some employees have already funded their IRAs for this year. As W-2 box 13 is a primary indicator of whether an employee is subject to limitations on deductible IRAs, I'm trying to understand when box 13 gets marked for the first year's PS contribution.

The thing that confuses me is the instructions for W-2 say: "Generally, an employee is an active participant if covered by ... a defined contribution plan (for example, a section 401(k) plan) for any tax year that employer or employee contributions (or forfeitures) are added to his or her account." If the contribution is made in 2008 after the 2007 W-2 is prepared and distributed, the box would not have been marked because the contribution would not have been made yet. Instructions for W-2C address correction of errors and not subsequent events like first year profit share contributions.

So my question for the forum is: if a first time PS contribution is made in 2008 based on employees' 2007 eligible compensation, how would you handle box 13 for 2007 and 2008?

[Kimberly S]

2007 contributions do not have to be deposited to the plan until 2008, much like 2007 IRA contributions can be made until 4-15-08. It would require marking the W-2 retirement plan box for 2007 because it is a 2007 contribution.

[masteff]

But does that presume the intent of making the contribution is known? Since profit share is optional, unless I'm not understanding something, it could potentially be decided after the issuance of W-2's that a PS contribution will be made.

[Bird]

In the situation you describe (optional contribution, nothing made before end of year) the W-2 box would NOT be checked to indicate coverage.

Check out Notice 87-16 and/or run a search on that within BenefitsLink. Or just click here

prior thread

[masteff]

Thank you very much. It made sense it'd be next year's W-2 but when did the tax code ever make sense.

[Mike Preston]

Once. But I am either too old to remember or I was too young at the time, or both.

[BG5150]

Why would a profit sharing contribution be reflected on a participant's W-2?

[masteff]

Why would a profit sharing contribution be reflected on a participant's W-2?

It's not the amount of the contribution, rather box 13 is a check box that indicates the individual is an active participant in a retirement plan.

[austin3515]

Whcih in turn effects eligiblity for deductible IRA contributions...

[Guest mjb]

The answer is in Pub 590, P 12 and comes from Reg. 1.219-2(d) which states that for IRA purposes a contribution to a DC plan is deemed to made in the later of the year the contribution is allocated or made to the participant's account.

[masteff]

True, and that's useful from the individual's point of view.

But my question pertains to the employer's point of view. Pub 590 also states: "The Form W-2 you receive from your employer has a box used to indicate whether you were covered for the year. The “Retirement Plan” box should be checked if you were covered." Therefore Bird's answer above is important because the notice and thread he provided make it definitive when the box on form W-2 gets marked by the employer.

[Appleby]

For a profit sharing plan, the individual is considered an active participant the year that the contribution is deposited to the participant’s profit sharing account…even if it is for the previous year.

For instance, if the 2007 contribution is deposited in 2007, the participant is an active participant for 2007 and the W-2 for 2007 must be checked

If the 2007 contribution is deposited in 2008, the participant is an active participant for 2008 and the W-2 for 2008 must be checked.

This is different for money purchase pension plans…where the participant would be an active participant for 2007 ( using the examples above), regardless of which year the contribution was deposited.