unallocated employer contribution

[k man]

a client makes a contribution in excess of its allocation formula but it is deductible and it is not in excess of 415. is there an excise tax if it is not allocated but left in a suspense account and applied to next years contribution?

[QDROphile]

Maybe disqualification.

[k man]

Maybe disqualification.

why disqualification?

after thinking about this again i am thinking it is a non deductible contribution and therefore subject to a 10% excise tax.

[Below Ground]

Does the plan have a discretionary allocation, or is it simply a fixed formula. If discretionary is available and the money was deposited during the year and it can be allocated under IRC 415 and it does not exceed maximum deductible limit; it MUST be allocated. I went through this recently and there is a thread somewhere that went through this. Even though this was contrary to what the client wanted to do, the allocation had to be made. I think it was under "Retirement Plans in General".

[QDROphile]

If it is a fixed formula, the contribution is not in accordance with plan terms, plus you are up against a very strong principle that contributions for a year have to be allocated for the year.

[k man]

Does the plan have a discretionary allocation, or is it simply a fixed formula. If discretionary is available and the money was deposited during the year and it can be allocated under IRC 415 and it does not exceed maximum deductible limit; it MUST be allocated. I went through this recently and there is a thread somewhere that went through this. Even though this was contrary to what the client wanted to do, the allocation had to be made. I think it was under "Retirement Plans in General".

it is a discretionary formula. so if it is made during the year it has to be allocated. i would like to see the thread if you remember where it is.

[BeckyMiller]

See Rev. Ruls. 80-155 and 2002-42 which interpret the regulatory concept of a specific written formula for the allocation of plan assets. See IRC Reg. Section 1.401-1(b)(1)(ii).

[k man]

See Rev. Ruls. 80-155 and 2002-42 which interpret the regulatory concept of a specific written formula for the allocation of plan assets. See IRC Reg. Section 1.401-1(b)(1)(ii).

im note sure any of this prohibits the employer from allocating say 3% to employees and not allocating anything above that if he has a discretionary formula. maybe i am missing something.

[Kevin C]

Look at the terms of the plan. It will have language that says how the contribution amounts are determined; discretionary in this case. Then it will have more language that spells out what happens to the amount contributed. If they deposited it, it has been contributed. As BeckyMiller mentions, the plan is required to have a definite allocation method for contributions. They have to follow the terms of the plan. As QDRO mentioned, failure to follow the terms of the plan is a qualification issue.

[K2retire]

Although I am in complete agreement with the advice provided on this question, I have seen many takeover plans come in with a balance in a suspense account that was deposited but not allocated in the same year. Apparently somebody thinks it's OK.

[Guest Sieve]

Let's say a Plan has the following language with regard to contributions: " . . . the Employer may make its contribution to the Plan for a particular Plan Year at such time as the Employer, in its sole discretion, determines." Let's also say that the Plan contains language relating to allocations as follows: "The Employer shall provide the Administrator with all information required by the Administrator to make a proper allocation of the Employer's contribution, if any, for each Plan Year."

I don't think anyone would disagree with the following statements (assuming a calendar year taxable year and plan year):

• a contribution can be made today (2/28/2009) for 2008, if so designated by the employer as a 2008 contribution, and then it can be allocated as a 2008 contribution when 2008 allocations are performed (if deducted as a 2008 contribution); and
  
• an employer could designate a contribution made today as a 2009 contribution, and then hold the $$ unallocated until the 2009 allocation is performed sometime in 2010 (and take a deduction for 2009).
  

But, is everyone saying in this thread that, if the plan contained language as above, an employer could not make a contribution today and designate it as a 2010 contribution, and then hold the contribution unallocated until 2010 allocations are made (assuming no deduction is taken until 2010 and appropriate excise taxes are paid)?

[Kevin C]

Sieve,

I don't see anything in the language you quote that gives the employer the discretion to decide whether or not an amount contributed this year will be allocated this year or held until a later year. The second quoted sentence just says the employer will provide enough information for the Administrator to be able to allocate the contributions in compliance with the terms of the plan.

If you did have plan language that gave the employer or the plan administrator the discretion to decide whether amounts contributed this year would be allocated this year or allocated in a later year, I think you still have a problem. When the terms of the plan say the contribution is allocated as of a date, it becomes part of the participants' accrued benefits on that date. I see the question as: " Can the employer use its discretion to cause an amount contributed this year to remain unallocated until a future year?" I think the answer to that lies in 1.411(d)-4, Q&A 4 and the answer is no, they can't do that. Otherwise, you are allowing the employer to use discretion to reduce participants' accrued benefits at the end of the current year.

[Guest Sieve]

Kevin --

I was thinking that the first quoted provision would permit a designation by the employer, at the time of the contribution, as to which year the contribution was earmarked for.

So, if I understand correctly, an employer flush with cash is not able to make a discretionary PS contribution (to a calendar year plan) in December, 2009 and designate, when made, that half of that contribution is an advanced 2010 contribution? In other words, that 2010 contribution absolutely could not be contributed until 1/1/2010? (But then, of course, if would have to be designated as a 2009 or 2010 contribution.)

What if the flush-with-cash employer maintains a 5% MPPP, and the 12/09 contribution is purposefully 10% of compensation with half desinated as a 2010 contribution?

[Kevin C]

Sieve,

I was reading your first quote as language addressing IRC 404(a)(6) where the contribution can either be designated for the current or prior plan year. If you can find a cite where it says a similar designation can be made for the current or a future year, I'll be glad to change my mind.

For a profit sharing plan, the plan has to contain a definite allocation method. Becky gave some cites for it. The employer contribution is discretionary, so we are not talking about an employer contributing more for the current year than the plan calls for. Once a contribution has been made, the plan says how it gets allocated. What is being proposed is that the employer has the discretion to override the plan's allocation method, only allocate part of the contribution in the current year and allocate the rest in a future year. I see that as an impermissible use of employer discretion to reduce account balances as of the end of the current year, by not allocating a portion of the contribution that would otherwise have been allocated at the end of the current year, and refer you to 1.411(d)-4 Q&A 4.

A MPPP is different in that the allocation formula produces a single contribution number that is not subject to employer discretion. If you contribute too much, you have no way to allocate the excess under the terms of the plan. But, you do have an non-deductible contribution and an excise tax.

[Guest Sieve]

Kevin --

The first quote could be read in the manner you suggest, but it also could be read otherwise.

I would agree, however, that any designation of a year which is made by the employer (when the contribution is made) cannot thereafter be changed (which appears to be what the employer wanted to do in the OP).

I know there must be a specific allocation formula in a discretionary PS. That's a given, in pre-ERISA regs. But there is no discretion by the employer--except discretion with respect to corporate assets, which absolutely is permitted--if a contribution is designated, when contributed, as being for a specific year (e.g., a 3/1/09 contribution being specifically designated WHEN MADE as a 2008 discretionary contribution as to 50% of the contribution and as a 2009 discretionary contribution as to the remaining 50%).

I would think that such an employer designation rule also would apply to a designation of a contribution as being for a future year (although, of course, that's not what happened in the OP). I'm looking for something specifically prohibiting an employer designation of a contribution being for a future year, and you're looking for something allowing it!! (But, right now I'm just too lazy to find the answer.)