P/S Deductability

[Guest Thornton]

In March, 1998, a company declares a p/s contribution for the plan year ending 12/31/97. This is accrued and reported on participant statements. The contribution is not made by the time the 1997 tax return is filed, but is not deducted on the tax return. To date, the company still has not made the contribution.

Can the company make the deposit now and deduct it on its 1998 corporate tax return even though it was allocated in a plan year covered by another return? Deducting on the 1998 return would not create a 404 problem.

[Chester]

This company has big problems if they still want the contribution to count towards the plan year ending 12/31/97. The regs clearly state the contribution must be made within 8 1/2 months of the end of the plan year. We are way beyond that point, so the deposit, if it is made, must be allocated for the plan year ending 12/31/98. It is too late to make a deposit for the 1997 plan year, so the employees need new statements generated showing no contribution was made for the 1997 plan year. Ouch!!

[LCARUSI]

Chester -

What regulation are you referring to?

[Guest dlm]

The contribution will need to be reallocated based on 1998 compensation. Because compensation for deductibility must be compensation in the tax year that the deduction will be taken.

[Chester]

LCARUSI, please see IRS Code Section 412c(10) for timing requirements concerning contributions made for plan years.

[Guest bswift]

I too think that it is too late to deduct the contribution for the 12/31/97 year on the return. Wouldn't one solution be for the company to make the contribution now and also make an additional contribution to make up the earnings that participants should have earned had the contribution been timely made? It's all subject to 404, but it will make your participants a happier group (less likely to file some lawsuit). the statements are a mess, but with a little explaining and an addt'l contribution, the company should be able to work through it.

[Lynn Campbell]

Regarding the deadline set by 412©(10), this section does not apply to a profit sharing plan, but to a pension plan which is covered by minimum funding standards. Therefore, this PS Plan could make a deductible deposit after 9/15/98 if the employer's tax return was on extension beyond that date.

[Guest Eric L]

I'm unaware of any circumstances that would provide a further extension of time to file beyond 9/15/98, assuming a 12/31 fiscal year end and that this is a corporation. The 1120 should be filed by 3/15, with a 6-month extension possible by filing Form 7004. How can you get an extension beyond that? What am I missing?

Otherwise, I agree that the best course of action is to make the contribution currently, making up for lost investment income. Beware of deductibility problems this may cause in the current year if they're also making 1998's contribution at this time.

How did this come about? What processes or procedures have been put in place to make sure announced contributions are timely remitted?

[LCARUSI]

It seems to me there are two issues here:

1) If the company makes the contribution now, can it still be considered a contribution for the 1997 *plan* year? And can it,therefore, be allocated based on employee participation and compensation in 1997?

It doesn't make sense to say yes, but I can't come up with a specific reason why the answer must be no. So I'll say yes.

2) If the company makes the contribution now, can they take a contribution for their 1998 *fiscal* year?

Yes if it is prior to their filing deadline for 1998.

In fact I guess they could deduct it for 1997 if they are still on some sort of extension for 1997 (but I doubt that's possible).

[Guest ESOPwizard]

The company may make the contribution now for the 1997 plan year,

BUT the contribution is treated as an annual addition for the

1998 plan year, which may cause the plan to become disqualified

for violating section 415. [Note: I am assuming that the plan year

and the limitation year are both the calendar year.]

[LCARUSI]

ESOPwizard -

When would the contribution have to have been made by in order for the contributions to be annual additions for 1997?

[Guest bswift]

the contribution would have to be made by the 3 1/2 month period (with extention) in order for it to have been an annual addition in 1997. If not, even though it might have been "on account of" the 1997 year, it can't be deducted (and therefore has to be treated as an annual addition) until the year actually contributed.

[Alonzo]

ESOPwizard --

Do you have a cite for your assertion that you can do the 1997 contribution now?

[Guest Eric L]

I think there may be a little more "wiggle room" here.

An employer contribution is an annual addition in a specific limitation year if it's credited to participant accounts as of any date within that limitation year. A contribution is considered "credited" within a particular limitation year if it's made no later than 30 days after the due date (including extensions as applicable) for the employer's tax return for the tax year within which the limitation year ends. [see IRC Reg. §1.415-6(B)(7)(ii) and IRC §404(a)(6)] The 30-day "grace period" is the "wiggle room" I talked about.

If we assume the ER is a corporation, and that tax, plan and limitation years begin 1/1, the tax return was due 3/15/98, the extension gave them until 9/15/98, and the 30-day "grace period" gave them until 10/15/98. Looks like it's too late to make the contribution and deduct it for 1997 if (a) there's no way to get an extension beyond 9/15 for the tax return or (B) they've already filed.

They could make a corrective allocation now, including foregone investment income. My understanding is that a corrective allocation is not an annual addition in the limitation year in which the correction is made; rather, it's an annual addition in the limitation year to which the corrective allocation applies. [Rev. Proc. 98-22, Sec. 6.02(3)(B)]. And, if the contribution was properly calculated prior to reporting on the statements, I don't think you need to recalculate it, since the corrective allocation should be based on 1997 compensation. [see Rev. Proc. 98-22, Sec. 6.02(3)(a)].

My understanding is that corrective allocations may be deducted in the year made if they don't exceed the 404 limits when aggregated with all other employer contributions for that year. You already said this wouldn't be a problem, so I see no reason the employer can't make the contribution and deduct it. I guess after all this, the simple answer to your original question is "yes."

[This message has been edited by Eric L (edited 12-31-98).]

[Guest ESOPwizard]

It is my understanding that a corrective allocation covers the situation in which a participant should

have received an allocation but was missed because of some plan administration mistake, for example a mistake

in determining eligiblity. In the case at hand, no contribution was made, and therefore, there was no mistake

to correct. I think that the client is stuck with the 415 problem if it wants to make the 1997 contribution now.