Consequences of failure to fund profit sharing plan

[Guest Theresa]

Can someone point me in the right direction for some terminology on the penalties, if any, for not funding a Profit Sharing Plan. And also what the employers options are at this point?

Their investment advisor is worried because they have not made a contribution for the past three years and now he wants to know what needs to be done about it.

[This message has been edited by Theresa (edited 01-06-2000).]

[Spencer]

What type of contributions were not funded? Top Heavy? Contribution specified in plan document? Or are you worried that no PS contribution has been made for several years?

[This message has been edited by Spencer (edited 01-05-2000).]

[Guest JPAdmin]

I am also looking for an answer to this question. Here are the circumstances: A company has a P/S plan that has not been funded for three years. The plan has a discretionary profit sharing formula. Is there any consequence for not funding the plan for many years? Say maybe four or five years?

I thought I had heard something about three years? Thanks.

[Erik Read]

There are "rules of thumb" but it depends on the way the plan is written - if contributions are to be made from "profits", then a plan could go for a few years without any contributions.

There just has to be a history of funding. If these plans are only 4 years old, and were only funded the first year - that may look suspicious under audit - if the plan is subject to audit.

Lets see some other opinions too.

[Guest JPAdmin]

Thanks Erik, I agree. I would love to see some other replies on this topic as well.

Is there a case to review? Is there some regulation? Or is this pension folklore handed down from administrator to administrator?

[pmacduff]

I remember this from my very first days learning about pensions..."substantial and recurring contributions". I looked in the Pension Answer Book and Q1:22 states: "Annual contributions to a profit sharing plan are not usually required. Further a company that has not done well in a particular year may decide to make either a minimal contribution or no contribution at all for that year. Nevertheless, a profit sharing plan is not permanent unless contributions are "recurring and substantial."" (Treas Reg 1.401-1(B)(2)

[Guest JPAdmin]

Thanks pmacduff, that is a good answer. I appreciate it.

[AndyH]

And accounts must be 100% vested upon a "complete discontinuation" of contributions, so if you go 3 years without contributing, somebody forfeits in the interim, and then the plan is terminated, you may be required to 100% vest that person.

[mbozek]

The IRS used to have a position that a PS plan would be deemed terminated if no contributions had been made for five consecutive tax years unless there was a substantial business reason, (e.g., lack of profits). Its a rather arcane concept and it appears only in the IRS audit guidles for plan terminations. The only consequence may be that the account balances must be 100% vested in the year there is a discontinuance of contributions which is no big deal for active participants. Since it is only an audit issue counsel should be retained to determine if the exception applies. But why is the employer maintaining a PS plan and paying for the cost of plan administration and 5500 forms if no contributions have been made for 3 years. Why not terminate the PS plan and adopt a sep plan with 100% vesting which does not require employer contributions or annual reports for any year or convert the PS plan to a 401(k) plan so employees can make pre tax contributions and allow for discretionary employer contributions which never have to made? The k plan only works if the plan is not top heavy- Otherwise the non hce will have to get a 3% contribution. The employee contributions will meet the substantial and recurring contribution requirement. The third option is to conver the PS plan to a 0% money purchase plan with after tax employee contributions.