What would prevent a PLLC from going back and funding retroactively

[Lori H]

A 3 member law firm never took advantage of allocating a profit sharing to the 3 members. While NHCE's were receiving a PS allocation, the attorney's did not. Reason unknown, perhaps to keep plan Non Top Heavy. Anyway, they are bringing up the question if it is possible to go back and fund the "x" amount of years that they did not receive an allocation. They are aware that there would be revised K-1's, Form 5500's, etc. I personally see red flags and a possible audit, but if it is permissible, how far back could they go? Has anyone here ever had such an inquiry?

[Kimberly S]

Does the document allow the NHCEs to get a different profit sharing allocation than the HCEs (cross tested groups)? If so, they probably can't go back very far and still stay within the limit of depositing the contribution by 30 days after the tax filing deadline.

But if the document calls for an allocation to everyone (pro rata or permitted disparity allocations) and they didn't do it correctly, they probably need to go through a correction program for all years that they skipped.

[Guest mjb]

Regardless of what year they plan to allocate the contributions to, the contributions will be deductible only in the year in which they are contributed or for the prior year if the contributions are made by the date for filing the tax return, in an amount that does not exceed 25% of the compensation of all eligible employees. See Rev. rul 76-28. There is nothing that can be done to revise K-1 and 5500s for prior years as the partners are cash basis taxpayers.

[Lori H]

Regardless of what year they plan to allocate the contributions to, the contributions will be deductible only in the year in which they are contributed or for the prior year if the contributions are made by the date for filing the tax return, in an amount that does not exceed 25% of the compensation of all eligible employees. See Rev. rul 76-28. There is nothing that can be done to revise K-1 and 5500s for prior years as the partners are cash basis taxpayers.

so, if they went back and funded for the plan years they didnt receive a p.s. allocation, it would just be allocated in the current plan year, They would not have the issue and cost of going back and amending 5500's, k-1's, etc. The profit sharing allocation is currently allocated based on a comp/pro rata percentage.

[Guest mjb]

yes. The contributions would be subject to the nondiscrimination rules in the tax year in which they are made and deductions will be taken in the year in which the contributions are made or the prior year as permitted under Rev Rule 76-28.

[Bird]

It's not clear to me what you're contemplating. As noted, if errors were made, there are correction procedures to be followed. You can't just arbitrarily say you're throwing in more money this year to fix prior years (although it may boil down to that, in essence).

[Lori H]

These are not errors. The partners intentionally skipped receiving a PS allocation for several plan years. Why, I am not sure. However, they are inquiring as to if they could go back and make up for the years they missed. So how would you allocate to the 3 partners? For example, let's say one plan year the firm made a $100,000 contribution on a comp percentage basis. Each partner received zero dollars of the allocation that was distributed to the NHCE's. Could you just allocate it in a future plan year as a supplement contribution in accordance to how it would have been allocated? Let's say each partner's comp percentage was 10%, therefore they WOULD have received $10,000 allocation. You allocate that in a future plan year as long as it does not exceed 415?

[Kimberly S]

What does the document say about how contributions are allocated?

[masteff]

What about the code section 4972 excise tax on nondeductible contributions? If the contributions are truly being made for the prior years, if it's past the deadline for deducting them then they would be nondeductible and result in the 10% excise.

Otherwise, if you're deducting them in this year, then why wouldn't they be subject to this year's annual additions limit?

[Bird]

These are not errors. The partners intentionally skipped receiving a PS allocation for several plan years.

Well, we're still not sure what that means. Was this a "group" allocation arrangement, where the plan sponsor had the option to make or not make contributions for a particular group or individual, or did they just decide to give everyone else a contribution and not themselves, terms of the document be damned? If the latter, then it is an error. I'll leave that to the correction experts.

If the former, then there should have been a memorandum describing how much of the contribution was to be allocated to each group. My recollection is that the IRS never gave firm direction on when the memorandum had to be signed, although I remember some mumbling about "contemporaneous" with the contribution. So now you're in the unhappy position of either not having a memorandum at all, which means that the contributions were not definitely determinable, or if you have a memorandum, I don't see how it could be changed at this point.

Any way you slice it, the answer is "no." (Unless, as noted above, there was an error if contributions were not allocated according to the terms of the document, and then there's some correction mechanism for that.)

[Lori H]

The document stated that all eligible participants receive a PS allocation based on a comp %. Therefore, despite the fact that the partners understood they would not be getting a PS allocation for whatever reason(TH concerns, etc), the document provisions were damned and I guess it would be an error. With that in mind I'm thinking an SCP would be available to the plan whereby the partners could go back and fund an allocation based on whatever PS funding was done for the years that they did not receive an allocation. Good course of action?

[Lori H]

I am thinking using the SCP to allow them to make up the PS contributions they did not allocate but could have and keeping in mind the 404 and 415© limits when they are determined.

Is there a flaw in this course of action?

[BG5150]

What about the top-heavy concerns now? It sounds kinda fishy if the plans would have been TH if the contribs were made in the past years but they weren't. Now all of a sudden you want to put that money in, effectively bypassing the TH rules for those prior years. (Assuming that putting in the money now wouldn't make the plan TH.)

[Lori H]

Well, the plan is now Safe Harbor which meets the Top Heavy Requirements.

[Bird]

I am thinking using the SCP to allow them to make up the PS contributions they did not allocate but could have...

I'm sorry but your choice of words is a little troubling to me. Maybe I'm being picky but it's not a "could have" situation, it's "should have but didn't." So either they're going to fix the error or they're not. If it's fixable under SCP that's the way to do it; I think there is a limitation on how many years back you can go. I don't know if there are exceptions to the 404 and 415 limits when using the program.

[Lori H]

I am thinking using the SCP to allow them to make up the PS contributions they did not allocate but could have...

I'm sorry but your choice of words is a little troubling to me. Maybe I'm being picky but it's not a "could have" situation, it's "should have but didn't." So either they're going to fix the error or they're not. If it's fixable under SCP that's the way to do it; I think there is a limitation on how many years back you can go. I don't know if there are exceptions to the 404 and 415 limits when using the program.

Yes Bird you are correct. It is in fact an error and therefore correctable under SCP. I too am not sure how many years they can go back and correct. This is truly a unique situation.

[Lori H]

I actually presented my situation to a revenue agent and received the following response:

Shooting from the hip for the first take. This information is provided

solely for conversational purposes and cannot be interpreted as an

official IRS position.

1)Were the PS contributions discretionary under the plan?

a) if yes, did the partners meet and declare by a resolution what the

contribution would be (contemporaneously with the end of the plan year

under discussion)? If they did not, then it a moot point and current

contributions for allocation with respect to prior years cannot happen.

Ship sailed. If they did meet and declare a discretionary contribution,

then they have the problem of failing to follow through. Also not good.

b) if the PS contribution was required by the document and not made and

allocated, then you need VC not SCP. Correction would have to be made

(without violating any other sections) and a fee paid to VC.

In general there is also a time limitation for self correction under RP

2007-27, after which you can take your chances on an audit (not

recommended) or go to voluntary compliance. Also in general, only

required operational (and some form) issues are subject to the RP.

Discretionary issues such as contribution amounts (not required under

the terms of the plan) have time limits to be invoked, usually the

longest time, is the due date of the sponsor's Federal tax return.

Hope this helps.