Prefunding ER Match Contributions

[Guest gself]

Anyone ever heard of an employer "prefunding" a match contribution (i.e., making the 1999 contribution in Dec. '98) and taking the deduction in the year it's funded, instead of the year to which it's applied? It's a standard 401(k) plan. Their CPA (KPMG) is telling them this is okay. I haven't heard of this before.

[Guest gself]

Clarification: I'm only concerned with the deductibility issue. Prototype plans usually don't contain provisions about employers' deduction rights, as far as I'm aware. This is more an accounting issue. And I'm not familiar with any "reasonableness test" that is applied to this type of situation. The contribution is a standard match to be allocated based on deferrals according to a discretionary formula. (i.e., some % of deferrals). It is not a 98 accrued contribution. It is intended to be the 1999 match. You can see why I'm so confused by KPMG's opinion. I'll approach them for more information and post it here if/when I get it. Thanks for everyone's input.

[MWeddell]

I think you're right to question it. There's no provision for setting up a suspense account (assuming it's not an ESOP) for pre-funding a contribution. I've only seen it where the employer is making a contribution early in the plan year that will be allocated as of a date later in the same plan year.

If KPMG is suggesting it, there's probably some correspondence describing the idea in the client's file.

[KIP KRAUS]

gself:

I would tghink that the 401(k) Plan Document would be the controlling factor in determining if the employer can do this. My question is, how is the match determined? It sounds to me like more of a profit sharing match, and thus done at the descrition of the employer. However it is determined, I would refer to the Plan Document for details first.

[Greg Judd]

Strikes me this action will struggle to satisfy a reasonableness test, let alone qualified plan issues. Why not prefund your payroll for the coming X months/years while you're at it?

The particulars of the situation must be pretty special.

[Guest Eric L]

As a matter of tax policy, matching contributions aren't deductible by the employer in one year if they're attributable to compensation earned by participants in a later year.

Is this really a matching contribution that's due under the terms of the plan in 1999, or is it a matching contribution attributable to 1998 that would normally be paid in 1999?

[Guest Harry O]

Actually, as I understand it, the scheme involves a little more than originally posted. The key is to change your plan year to overlap with your corporate tax year. This allows pre-funding and avoids the issue of having unallocated amounts at the end of the plan year. I think it works but you should ask to talk with the accountants who peddled the idea so that you can get comfortable with it . . .

[Guest gself]

Good point Harry O. I'll check on this and post whatever answer(s) I get. Thanks again.

[Guest dlm]

Be careful if your Plan year does not match your tax year. See Rev Ruling 90-105 for examples of fiscal year not matching plan year and the deductions that may be taken.

Also, i believe you need IRS approval to change your plan year to something other than fiscal year.

[MWeddell]

IRS permission for changing a plan year is only required for pension plans. See Rev. Proc. 87-27. Since we're talking about a plan that has a match, it sounds like it's probably not a pension plan.

[Guest gself]

MWeddell is right. No amendment necessary. Again, this is a standard 401(k) plan with a match. Thanks DLM for the Rev Rul site. It turns out their attorney suggested changing their plan year to a 12/30 plan-year-end. They then fund the contribution on 12/31 and take the deduction in the year it's funded instead of the year for which it's intended (ala Harry O). We're not through with this issue yet...it sounds like they're going to run into some definite problems. Thanks again for everyone's input.