p/s contributions never made

[Guest lip]

We are taking over a p/s 401k that had a 4 1/2 contribution formula for 2005-07 that was never made.

In addition the 5500 for the 3 years in question showed those contributions as BEING made.

What do we do.VCRP and have employer contribute monies with interest asap.?

what about incorrect 5500s?

thanks

[ERISAnut]

My approach, as always, would be to break this monster up into various components; and deal with each individual component.

1) Plan provided for mandatory profit sharing contribution to employees. The contribution was not made where the participants were entitled to this under the written terms of the plan. We agree that the contribution must be made. We question whether or not there should be a make-up of lost earnings associated with those 'employer' contributions not being made timely. While this may be debatable, I would argue the affirmative as the plan document language would likely presribe a deposit timing (by tax filing deadline including extensions). Based on this language, it may be a safe argument to provide lost earnings. However, if the plan language merely stated that in order for the contribution to be deductible (which would not make sense as tax-law determines deductibility), then there may be an argument that there wasn't an determinable deadline on which those contributions were to be made (but you'll never hear me make this argument).

2) If the employer has taken a deduction for these contributions during those respective years, but failed to make those deposits, then the employer would have to amend their income tax returns for those years. The contribution, when made (assuming current year) will be deductible this year as a reasonable and necessary business expense of the plan (IRC Section 162) and not subject to the 404 deductibility limits.

3) 415 Limits. There is a provision within 415 on the deadline in which amounts must be made in order to be considered annual additions for the year. From memory, I think this would not apply where the plans language required the contribution (since it was not discretionary). Would need to research.

4) 5500. Would amend to reflect the accurate series of events. It is possible to include a contribution and then accrue it on the form 5500. But, over several years... May be a judgement call, but I will amend.

[Guest Sieve]

-nut --

Why do you think the deduction is limited only by IRC Section 162? In fact, that deduction would be allowable only under IRC Section 404, and therefore would be subject to those limitations: 25% of eligible compensation (assuming no plan subject to Section 412 is also in force). Otherwise, just wait a few years to make the contribution and deduct it without limit. Great game. How do I play?

For IRC Section 415, the contribution counts as an annual addition for the year with respect to which the contribution was made, as long as the contribution is made no more than 30 days (I beleive) after the last date permissible for a deductible contribution. Any contribution made after that date would be considered in the IRC Section 415 testing for the year of the contribution.

I would agree that the corporate (or other) tax returns need to be amended, with appropriate additional taxes & interest paid (if necessary), and that Forms 5500 be amended (and I don't see how an accrual can continue for more than the first year it is reported).

[K2retire]

I also believe 30 days after the tax return due date is correct. And since the 415 limit is based on year of contribution comp, and some of the folks due a contribution from these historical periods may not have any current comp, you have a potential problem.

Lip, are you sure you really want to take on a client with this many problems?

[Guest Sieve]

You bring up an interesting point, K2. How do you correct for those who have no income in the year of the correction?

It is interesting to note that EPCRS (at least the new one) indicates that contributions made to correct for a failed ADP are considered for Section 415 purposes as having been made in the year of the failure, but does not have similar language with regard to other failures.

What to do? Does the IRS expect that you also request, under the same VCP application, a waiver of Section 415 violations for the year of the correction? Doesn't seem quite right that you correct (a good thing) but run into Section 415 failures as a result, especially since the correction for that (if that is the purpsoe of the VCP application) is to put the excess into a suspense account to reduce future contributions. What kind of sense does that make in a scenario where you are making contributions for the benefit of participants who did not receive what they were entitled to, and then are required to use their money for the benefit of others just because they no longer are employed there anymore?

[ERISAnut]

The issue becomes a makeup contribution that must be made to the plan. Regardless of deductible contributions in the current year, this contribution is provided to correct an inaction in the previous years. When this is the case, it is typically deductible as a necessary business expense for maintaining the plan.

[Kevin C]

Since we are talking about a correction, I would look to Rev Proc 2006-27.

Section 6.02 4(b) looks like it answers a couple of questions:

(b) A corrective allocation to a participant's account because of a failure to make a required allocation in a prior limitation year will not be considered an annual addition with respect to the participant for the limitation year in which the correction is made, but will be considered an annual addition for the limitation year to which the corrective allocation relates. However, the normal rules of §404, regarding deductions, apply.

[Guest Sieve]

So, ERISAnut, this year's contribution plus the missed contribution is not limited by Section 404?

[Guest Sieve]

Thanks, Kevin. I didn't read your post before responding to ERISAnut.

The same provision is in the new EPCRS, still at Section 6.02(4)(b), identically worded. So, deductions are limited by IRC Section 404 based on total contributions made in the year of the correction, but IRC Section 415 is determined based on the year with respect to which the contribution was made. Both make sense: without the 404 rule the contribution could be fully deductible in the current year, and without the 415 rule the allocation would not be possible for a terminated employee who was entitled to the allocation for a past year.