Contribution Made After Tax Due Date

[Guest Grumpy456]

A client uses a TPA that maintains a daily-valuation platform. The client's plan uses a calendar year plan year. For purposes of the 2007 plan year, the client elects to make a $250,000 profit sharing contribution. The client's tax return is due, on extension, September 15, 2008. In late August, the client mailed a check to the TPA in the amount of the profit sharing contribution. The TPA should have processed the check and allocated the contribution to eligible participants according to the participant investment elections. Instead, the TPA forgot about it and just realized that it never processed the check in response to the client's question--why hasn't the check cleared yet? Is this a defect/problem in need of correction?

It seems to me that there are multiple problems including at least the following:

1. The terms of the plan say that an allocation of any contribution other than 401(k) contributions will be made for a year no later than the client's tax return due date for that year (including extensions). The client's tax return due date for 2007, including extensions, was September 15, 2008 and the contribution for 2007 was arguably not allocated by that date.

Is there an operational defect here to be corrected (I'm not sure how to correct it if there is)?

2. Can the client deduct the $250,000 contribution on its 2007 tax return since the contribution was not actually deposited by September 15, 2008?

3. Is there any fiduciary exposure to the trustees for not having guaranteed that the TPA did its job and what changes should be made going forward, if any?

[K2retire]

Once the check was out of the control of the employer (in the mail) isn't it then effectively a contribution that has been deposited?

The filing deadline for a tax return is a postmark by midnight on the particular date. Most banks accept deposits for the same day's business only until 2:00. Does that mean that deposits delivered to the bank between 2:00 and midnight on the filing date don't count?

Whether a prudent fiduciary can continue using a TPA who forgets to make deposits is an interesting question.

[PensionPro]

As long as the mailing was timely and the client has a copy of the postmark or proof of delivery, the deposit should be considered timely under Section 7502, especially since the TPA is maintaining the daily valuation platform:

7502(a)(1) Date of delivery.--If any return, claim, statement, or other document required to be filed, or any payment required to be made, within a prescribed period or on or before a prescribed date under authority of any provision of the internal revenue laws is, after such period or such date, delivered by United States mail to the agency, officer, or office with which such return, claim, statement, or other document is required to be filed, or to which such payment is required to be made, the date of the United States postmark stamped on the cover in which such return, claim, statement, or other document, or payment, is mailed shall be deemed to be the date of delivery or the date of payment, as the case may be.

7502(a)(2) Mailing requirements.--This subsection shall apply only if--

7502(a)(2)(A) the postmark date falls within the prescribed period or on or before the prescribed date--

7502(a)(2)(A)(i) for the filing (including any extension granted for such filing) of the return, claim, statement, or other document, or

7502(a)(2)(A)(ii) for making the payment (including any extension granted for making such payment), and

7502(a)(2)(B) the return, claim, statement, or other document, or payment was, within the time prescribed in subparagraph (A), deposited in the mail in the United States in an envelope or other appropriate wrapper, postage prepaid, properly addressed to the agency, officer, or office with which the return, claim, statement, or other document is required to be filed, or to which such payment is required to be made.

7502(b) Postmarks.--

This section shall apply in the case of postmarks not made by the United States Postal Service only if and to the extent provided by regulations prescribed by the Secretary.

7502© Registered and Certified Mailing; Electronic Filing.--

7502©(1) Registered mail.--For purposes of this section, if any return, claim, statement, or other document, or payment, is sent by United States registered mail--

7502©(1)(A) such registration shall be prima facie evidence that the return, claim, statement, or other document was delivered to the agency, officer, or office to which addressed; and

7502©(1)(B) the date of registration shall be deemed the postmark date.

7502©(2) Certified mail; electronic filing.--The Secretary is authorized to provide by regulations the extent to which the provisions of paragraph (1) with respect to prima facie evidence of delivery and the postmark date shall apply to certified mail and electronic filing.

[Guest mjb]

Under IRC 404(a)(6) contributions are deducted for a taxable year if they they meet the reqirements of IRC 404(a)(3), i.e., are paid into a profit sharing trust by the due date. What is the basis for the deposit of the contribution to the TPA being deemed paid to the trust? Is the TPA the trustee? Or was the TPA supposed to forward the check to the trustee. If the TPA is deemed to be the agent of the trustee then a timely payment to the TPA would be deductible under IRC 404(a)(6).

[K2retire]

The original post sounds like the TPA is the custodian of the assets.

[Guest mjb]

The original post sounds like the TPA is the custodian of the assets.

If thats true why did the OP state that the check was not actually deposited by Septermber 15?

What is meant by The TPA failed to process the check by 9/15? Is it a failure to deposit? If the custodian had possession but failed to deposit the check then the contribution is timely and the plan would be owed interst on the late contribution.

[J Simmons]

In Rowell v CIR, TC Memo 1988-410, 56 TCM 11 (1988), the Tax Court found insufficient the taxpayer's offered proof that payment was made by the due date in that situation of August 15. That evidence was a transmittal letter from one bank to another "instructing that the accompanying check for $4,000 be deposited into Mr. Rowell's Keogh account". The check was not credited to the Keogh account ledger sheet until September 30.

There, the offered proof was a letter that mentioned the $4,000 contribution. That wasn't enough.

Postmarks are great if you have them and have proof of what was sent in the mailing. If challenged, you will need proof that the certified mail receipt, for example, relates to a mailing that in fact included the payment.

K2retire and mjb make excellent points, in their different ways, about whose agent was the TPA? If the employer could have pulled the payment back after September 15 by asking its agent, the TPA, to return the unprocessed check to the employer, the payment certainly was not made by September 15. If the TPA was under a legal compunction not to return the check even if requested by the employer, then it would likely have been made--if it could be proven, see above.

[Guest mjb]

In Rowell v CIR, TC Memo 1988-410, 56 TCM 11 (1988), the Tax Court found insufficient the taxpayer's offered proof that payment was made by the due date in that situation of August 15. That evidence was a transmittal letter from one bank to another "instructing that the accompanying check for $4,000 be deposited into Mr. Rowell's Keogh account". The check was not credited to the Keogh account ledger sheet until September 30.

There, the offered proof was a letter that mentioned the $4,000 contribution. That wasn't enough.

Postmarks are great if you have them and have proof of what was sent in the mailing. If challenged, you will need proof that the certified mail receipt, for example, relates to a mailing that in fact included the payment.

K2retire and mjb make excellent points, in their different ways, about whose agent was the TPA? If the employer could have pulled the payment back after September 15 by asking its agent, the TPA, to return the unprocessed check to the employer, the payment certainly was not made by September 15. If the TPA was under a legal compunction not to return the check even if requested by the employer, then it would likely have been made--if it could be proven, see above.

When I had an HR-10 account at Schwab I would hand deliver my a check for the contribution to the local schwab branch near me shortly before Oct 15 and I would be given a written receipt from Schwab stating the date, the amount and the account # so there was never any doubt of a timely contribution. When the contribution is mailed to the custodian or trustee shortly before the due date, the employer is taking a risk that the contribution will not be received or documented as credited to the retirement plan by the due date.