late deposits, safe harbor and profit sharing

[eilano]

Client has Safe Harbor 401(k) plan with SH Match requirement. The total employer contribution for the 2008 tax year was $20,000 for Safe Harbor Match and $60,000 for the Employer Discretionary Profit Sharing Contribution. The client made a timely deposit of only $60,000. Assuming we can use a portion of this deposit for the required safe harbor match, the client still has an issue with what they put on their 2008 corporate tax return.

What are the client options if they still want the total $60,000 allocated as a profit sharing contribution? If they deposit it now is it deductable for 2010 and/or does the 10% excise tax penalty apply for a nondeductable contribution for 2008.

What would be the issues if the only deposit due had been the Safe Harbor Match and it was not deposited by the corporate due date? Penalties?

[Bird]

I would treat the first $20,000 as SH match, and the next $40,000 as PS...assuming that the investments are pooled; if they are self-directed and the money already went to PS I might reconsider, but then lots of questions come up about how it was allocated. The overdeduction is someone else's problem.

I guess if you really wanted to, you could treat the $60,000 as PS and put in the $20,000 as SH match now, as a self-correction, with interest. But I wouldn't go there; now you have to deal with contributions being made in different limitation years and potential 415 violations. And no matter what you do, you can't make the full $80,000 legitimately deductible, so what's the point? No matter what you do now, you can't fix the overdeduction.

There's no nondeductible contribution penalty; that would be if they put in too much and some of it was not deductible.

[movedon]

I wouldn't necessarily think making the sh contribution now as a corrective contribution would cause any 415 problems. I think since the contribution would be corrective, it would be a 415 addition for the year the correction applies to, not to the current or prior (if you're inside the previous year's 415 crediting deadline) year. Otherwise, as usual, I agree with Bird.

[Bird]

I wouldn't necessarily think making the sh contribution now as a corrective contribution would cause any 415 problems. I think since the contribution would be corrective, it would be a 415 addition for the year the correction applies to, not to the current or prior (if you're inside the previous year's 415 crediting deadline) year.

Could be, I'm not sure. If they were deposited on Dec 31 2009, they would not be "late" for SH purposes, but would be 2009 additions, not 2008. So the correction might apply to 2009, but I dunno. I try hard to avoid these situations and am no expert on correction issues.

[Kevin C]

Rev. Proc. 2008-50, Section 6.02(4)(b) A corrective allocation to a participant's account because of 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 the corrective allocation relates. However, the normal rules of § 404, regarding deductions, apply.

Even if deposited on 12/31/2009, a 2008 SH contribution is most likely still late. Our documents say the employer contributions must be deposited by the due date for the employer's tax return including extensions thereof. If this plan says the same, that sets the deadline for making the SH contribution. If it is deposited late, that is an operational failure, so EPCRS is available. But, note that a correction doesn't help with the deduction issue.