Safe Harbor 401(k) plan deduction

[John Feldt ERPA CPC QPA]

Suppose a corporate plan sponsor contributes their required 2009 Safe Harbor contribution on December 31, 2010 (due to cash flow reasons). The plan document requires the contribution and the notice was issued timely. They have lots of room under their eligible compensation for doubling up their 2010 and 2009 contributions since they are only planning on contibuting the SH amounts.

By doing this, they will miss the deduction deadline for their 2009 tax return. I assume this would be deductible on their 2010 return?

If so, I don't see the section under 404 that quite gets me there - any ideas?

Also, if a participant quit in 2009 and the deduction for that person occurs with the 2010 return, that's not a 415 issue, right?

[austin3515]

The safe harbor would be deductilbe in 2010 as an ordinary business expense, when paid. Because the deposit was made after the due date of the croporate returns, they're just not eligbile for the special rule allowing them to deduct in 2009.

And yes, there is a 415 issue. Since this was intentional, I doubt the 415 relief that I think EPCRS includes for correction plan defects would be available.

[Kevin C]

I don't see anything in Rev. Proc. 2008-50 that would have the reason for the failure affect the 415 treatment of the the correction. The reason for the failure is a factor in determining whether it was an insignificant or significant failure under SCP. Also, if the service decided the failure was an egregious failure, it would not be eligible for correction under SCP (Section 4.11). From the description of "egregious failure" in 4.11, the IRS wouldn't have to try very hard to consider this failure as egregious. There is also a higher filing fee for VCP correction of egregious failures (section 12.06).

[Guest Sieve]

Perhaps this is a picky point but, assuming you can correct for 415--and I think you can--that permits you to set aside the excess amounts (representing the 415 violation in 2010 for the late contribution for the individual who terminated in 2009) in an unallocated account for use by the employer for 2010 &/or beyond. For others, there is no 415 failure presumably (if only SH contributions are being made.

But, wouldn't you also have to apply under VCP to have the Section 415 limitation for this participant (for 2010) waived? If it isn't waived, and considered for 415 purpsoes for 2009, then the individual cannot otherwise receive the contribution because of his/her 2010 Section 415 violation, correct? In other words, the SH contribution is considred timely made for 2009 because it was made by the end of the next year (2010), but, for 415 purposes, it is considered in 2010--meaning that 2009 terminees will always have a 415 violation unless a waiver puishes it back to 2009.

What am I missing?

[John Feldt ERPA CPC QPA]

That's where we were, looking at the Safe Harbor contribution deadline square in the face, and we saw December 31, 2010. Hmmm, was it a trick, a ploy, something the regulation writers did to lull us into thinking that the contribution can really be made as late as they say? No Johnny, the IRS just doesn't behave that way... (sorry, my wife is watching an old movie now).

If no one terminated, and the 2009 SH contribution is made on 12/31/2010, then they've met the contribution deadline. In that case, they should be able to deduct the amount on their 2010 return, the 2009 SH status is not jeopardized since they met the contribution deadline, and as long as each participant has enough wages in 2010 to cover at least the safe harbor amount, we have no 415 violation - right?

[austin3515]

That's where we were, looking at the Safe Harbor contribution deadline square in the face, and we saw December 31, 2010. Hmmm, was it a trick, a ploy, something the regulation writers did to lull us into thinking that the contribution can really be made as late as they say? No Johnny, the IRS just doesn't behave that way... (sorry, my wife is watching an old movie now).

Let's not complain too loudly - now you have just one small problem (tiny 415 for a handful of people), and not a big one (ADP refunds)!!

[Tom Poje]

I'm not sure there is a 415 issue. lets suppose the plan is not a safe harbor, just a regular 401k - so regular that it fails ADP testing. so regular the problem was not known until 2 1/2 months after the end of the plan year. I know you folks never have that problem, but some of us do.

so to avoid the tax penalty the company alloactes a QNEC, typical document QNEC to all NHCEs.

the regs clearly say the QNEC can be provided as late as 12 months after the end of the plan year, and I have never heard anyone raise the issue of a 415 limit in this case- even if the QNEC went to employees who terminated during the plan year, and would have no comp 12 months after the end of the plan year. I've never seen anything written anywhere that says "you can give the QNEC, but only to those people who have enough comp in the following so there is no 415 violation".

A safe harbor contribution is also a QNEC, so I don't see why the rules change in the case of a safe harbor. Maybe I understand it wrong, but I thought a QNEC was one of those 'exceptions' to the rule, because the regs throw in the rule about "must be made within 12 months after the end of the plan year".

[Kevin C]

The 415 exception in Rev. Proc. 2008-50, section 6.02(4)(b) has to apply. Otherwise, you could have someone who does not receive the required safe harbor contribution, but you have no way to correct it.

I think I would correct it as a significant failure under SCP and let the client know the IRS could decide that they should have used VCP. I have no idea what the IRS would do, but it would be in the client's favor that the correction will have already been done before the IRS gets there. Besides, the Rev. Proc. doesn't say they can't use SCP in this situation, it only says the IRS can decide that they are not eligible to use SCP.

[Guest Sieve]

Kevin -- Thanks for citing to EPCRS Section 6.02(4)(b). I thought I knew the rule re: corrections being applied to the annual addition limitation in the proper year, but I couldn't find it--&, I also wondered whether the intentional nature of the "error" might have some kind of an impact on that rule.

[John Feldt ERPA CPC QPA]

When the cash-flow of a plan sponsor changes, how does that make this egregious?

To re-frame:

Under the Final 401(k) Regulations, in T.R. 1.401(k)-3(h)

“... a safe harbor matching contribution must be made within 12 months of the end of the plan year.”

Under the 415 Regulations, T.R. 1.415-6(b)(7)(ii)

“… employer contributions shall not be deemed credited to a participant's account for a particular limitation year, unless the contributions are actually made to the plan no later than 30 days after the end of the period described in section 404(a)(6) applicable to the taxable year with or within which the particular limitation year ends.”

Under Internal Revenue Code Section 404(a):

“Contributions … shall be deductible…in the taxable year when paid…”

and

“a taxpayer shall be deemed to have made a payment on the last day of the preceding taxable year if the payment is on account of such taxable year and is made not later than the time prescribed by law for filing the return for such taxable year (including extensions thereof).”

Understood: Section 404 allows that contributions made during the 2010 year can be deducted on the 2010 tax return (in general: to the extent the contributions were not deducted with the 2009 tax return and did not exceed other limits that prevent the deduction). No 2009 deduction would be allowed for the safe harbor contribution if it is made after the 2009 tax return filing deadline (plus extensions, if applicable).

1. If the 2009 safe harbor contribution is made by December 31, 2010, the plan meets the Safe Harbor contributions requirements under 1.401(k)-3. Thus, a contribution for 2009 made as late as December 31, 2010 does not violate the safe harbor rules. Later than December 31, 2010 would be a defect that jeopardizes the plan’s qualified status.
   
2. 
   
3. Since the contribution is made more than 30 days after the tax return filing deadline, the contribution counts as against the 2010 IRC 415 limit, not the 2009 IRC 415 limit. This creates an issue because the contribution is then not deemed to have been credited to the participant’s account for the 2009 year under IRC 415. Participants that have terminated in 2009 or have terminated in 2010 without sufficient compensation to support the allocation of the required contribution are the focus here.
   
4. 
   
5. The IRS and the plan document provide that a plan sponsor may correct plan issues and even significant errors by means of self-correction. Under section 6.02(4)(b) of Revenue Procedure 2008-50, a plan will consider that “a failure to make a required allocation in a prior limitation year is not considered an annual addition with respect to the participant for the limitation year in which the correction is made, but is considered an annual addition for the limitation year to which corrective allocation relates.”
   

This applies to insignificant failures and significant failures (if corrected within the 2-year timeframe).

Does this justify the Safe Harbor contribution deadline in the regulations, without which, the regulatory deadline has little actual meaning (except maybe for a non-profit entity?).

If the December 31, 2010 deadline in this example, under 1.401(k)-3, is met but causes a disqualification problem, why didn’t the regulations provide a deadline identical to the 404 deadline or the 415 annual additions deadline?

Am I way off base to think this is alright?

[austin3515]

I think what you've all said makes perfect sense. I'm now able to reconcile the 30 day grace period with the "12 months after plan year-end rules" for safe harbor. The key to 415 special treatment in EPCRS appears to be the required nature of the allocation. So for example, the 30 day grace period effectively only applies to discretionary contributions.

And Poje's point is well taken that there must be an implied excpeiton for ADP correction QNECs (of course I would have preferred an explicit one...)

This is issue has finally been put to rest. Thanks for the EPCRS site!!

[Kevin C]

When the cash-flow of a plan sponsor changes, how does that make this egregious?

Rev. Proc. 2008-50, Section 4.11 Egregious failures. SCP is not available to correct Operational Failures that are egregious. Egregious failures include: (a) a plan that has consistently and improperly covered only highly compensated employees; (b) a plan that provides more favorable benefits for an owner of the employer based on a purported collective bargaining agreement where there has in fact been no good faith bargaining between bona fide employee representatives and the employer (see Notice 2003-24, 2003-1 C.B. 853, with respect to welfare benefit funds); or © a defined contribution plan where a contribution is made on behalf of a highly compensated employee that is several times greater than the dollar limit set forth in § 415©. VCP is available to correct egregious failures. However, egregious failures are subject to the VCP fees described in section 12.06 and, for purposes of section 12.06, an egregious failure would include any case in which the IRS concludes that the parties controlling the plan recognized that the action taken would constitute a Qualification Failure and the failure either involves a substantial number of participants or beneficiaries or involves participants who are predominantly highly compensated employees. Audit CAP also is available to correct egregious failures.

I read that as saying that if the IRS decides the sponsor knew it would cause a problem and it affects a substantial number of participants, it becomes egregious. That isn't a difficult standard to meet, so I hope the IRS uses it sparingly.

Austin, I think you are being too restrictive in your view of "required" needed for the 415 exception for corrections. I think that once a discretionary contribution has been made, the allocation becomes required under the terms of the plan. If it was not allocated correctly, the correction falls under the 415 exception. Otherwise, there would be situations where you could not use the Rev. Proc.'s correction method for PS contributions in Appendix B, Section 2.02(2)(a)(iii)(B).