Timing of Contributions

[emmetttrudy]

Can a plan sponsor make a contribution and allocate it towards 2009, and then make contributions after that and allocate them towards 2008? For example, let's say a plan sponsor makes a contribution of $10k on July 1, 2009 and would like it to count towards the 2009 plan year. But then makes another contribution on 9/15/2009 that he would like to count towards the 2008 plan year. Can the 2008 Schedule SB show the 9/15/2009 contribution and the 2009 Schedule SB show the 7/1/2009 contribution?

[Effen]

Sure, it happens all the time. A company may be making quarterly deposits towards 2009 before they have completed their 2008 final payment.

As long as they designate which year the deposit is for, there is not problem.

PPA had some ordering rules that you might want to look at, but I don't think they change what I said.

[Andy the Actuary]

Apparently -- and this is from the 2009 EA meeting (see an earlier thread) -- a plan sponsor can no longer deduct a contribution for a prior year if it is not claimed on the prior year SB. For example, a contribution made in 2009 and deducted in 2008 must be claimed on the 2008 SB and cannot be claimed on the 2009 SB.

[FAPInJax]

I believe you will find that it is not OK to time the contributions in that manner. IRS has stated several times that PPA has now imposed a first in, first out type approach to contributions. This may be substantiated by looking at the fact that there is a 'funding deficiency' for 2008 until contributions equaling the minimum required have been made and therefore any contributions are used to satisfy it first. Once that point is reached contributions should be able to designated for 2008 versus 2009.

Of course, all of this is subject to IRS interpretation or common sense whichever administrators prefer.

[Andy the Actuary]

Of course, all of this is subject to IRS interpretation or common sense whichever administrators prefer.

Grebny-Hogan award for best comment of 2009.

[david rigby]

Gray Book Q&A 2009-1 may be useful:

QUESTION 2009-1 Funding: PPA: Ordering Rules for Contributions

Under pre-PPA rules, contributions made within 8½ months after the end of a plan year were permitted to be designated as made for the current plan year or the prior plan year.

Proposed regulation §54.4971©-1©(1) states that an unpaid minimum required contribution (UMRC) is any contribution for a plan year that is not paid by the due date under §430(j)(1) - which is 8½ months after the end of the plan year. The ordering rule under §4971©(4)(B) and prop. reg. §54.4971©- (d)(2)(ii) provides that a contribution will first be attributed to any earlier plan year for which there is any UMRC. There is also an ordering rule in §430(j)(3)(b)(iii) and prop. reg. §1.430(j)-1©(2)(ii) for quarterly installments. This rule specifies that contributions are first credited against the earliest unpaid quarterly installments.

Consider the following example. A calendar year plan with a January 1 valuation date is subject to quarterly contributions during 2009 but was not subject to the quarterly contribution requirement for 2008. The 2009 required annual payment for determining the quarterly payment is $4 million, so that the amount of each 2009 required installment is $1 million. As of the beginning of 2009, $3 million of the 2008 minimum required contribution has not yet been paid. The effective interest rate (EIR) for 2008 is 6%.

a) As of April 15, 2009, $3 million of the 2008 minimum required contribution remains outstanding. The sponsor makes a $1 million contribution on April 15, 2009. May the sponsor designate this contribution as either a 2008 plan year contribution or a 2009 plan year contribution and, if so, how and when must this designation be made?

b) The sponsor elects to designate the April 15, 2009 contribution as a 2008 plan year payment. As a result, as of July 15, 2009, the sponsor has not yet paid the April 15, 2009 quarterly payment. The sponsor makes a $1 million contribution on this date and designates it for the 2009 plan year. How is this contribution treated for purposes of calculating the late quarterly interest charge?

c) The sponsor did not make the full 2008 minimum required payment. As of October 15, 2009, the 2008 unpaid minimum required contribution (UMRC) is $2,072,501 million ($3 million less the $1 million paid on April 15, 2009, discounted back to January 1, 2008). The sponsor makes a $1 million contribution on this date. How is this contribution applied?

d) If a plan that is subject to quarterly installments has not yet satisfied the minimum required contribution for the prior plan year, and no specific designation has been received as of the filing of the applicable Schedule SB, is it reasonable to credit contributions in the following order (for a calendar plan year)?

1) any unpaid minimum contribution for years prior to the immediately preceding year

2) any unpaid quarterly installments for the immediately preceding plan year

3) the first quarterly installment (4/15) for the current plan year

4) the second quarterly installment (7/15) for the current plan year

5) the remaining (if any) required contribution for the prior plan year (9/15) – this item would take precedence over items 3 and 4 for contributions made on or after 9/15

6) the third quarterly installment (10/15)

7) the final quarterly installment (1/15 of the next year)

8) the remaining (if any) required contribution for the plan year (9/15 of the next year)

RESPONSE

a) Yes. Because the relevant contribution is not yet an UMRC, the sponsor may designate the plan year to which a contribution is applied for minimum funding purposes by notification to the enrolled actuary in order for the actuary to report the designation as part of the filing of Schedule SB for the applicable year.

b) The July 15, 2009 contribution is applied to the April 15, 2009 required quarterly payment as this is the earliest quarterly payment date for which a required installment has not yet been paid. The late interest calculation for this payment ceases, while a late interest calculation for the July 15, 2009 quarterly begins.

c) After September 15, 2009, the plan has a 2008 UMRC. All contributions after this date must first be applied against this UMRC until it is fully satisfied. The $1 million payment is discounted back to January 1, 2008 at the 2008 EIR, reducing the 2008 UMRC to $1,171,635.

d) This is a reasonable method for ordering contributions, but whether it is the only reasonable method for ordering depends on the actual contribution dates.

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