Top heavy contribution

[Belgarath]

Unincorporated client sponsors both a DB and a PS. PS plan provides for the 5% top heavy minimum. Calendar plan and fiscal years. Client says they will contribute (x) for 2009, which is substantially higher than the 5% TH minimum. At a later date, LONG after the tax filing deadline, says they decided not to contribute to the PS plan. (Not realizing/understanding that the 5% isn't discretionary in this case.) Client did NOT have a tax extension for 2009, so filing date was 4/15/10. So they are now contributing within the next 30 days, and DEDUCTING for the fiscal year in which paid - that is, 2010.

So here's the question: under the 415 regulations, in order to be considered "allocated" for 2009 - the contribution must be made within 30 days after the end 404(a)(6) period.

(B) Date of employer contributions. For purposes of this paragraph (b), employer contributions are not treated as 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. If, however, contributions are made by an employer exempt from Federal income tax (including a governmental employer), the contributions must be made to the plan no later than the 15th day of the tenth calendar month following the end of the calendar year or fiscal year (as applicable, depending on the basis on which the employer keeps its books) with or within which the particular limitation year ends. If contributions are made to a plan after the end of the period during which contributions can be made and treated as credited to a participant's account for a particular limitation year, allocations attributable to those contributions are treated as credited to the participant's account for the limitation year during which those contributions are made.

With no tax extension, does this mean that in order to be considered "allocated" for 2009, it must be made by 30 days after 4/15, since there is no tax extension? Or, can the phrase "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" be considered to include the 404(a)(6) period that would have been available if there was a tax extension?

I choose to employ the latter interpretation, but it does seem a bit gray to me, and I wondered what others thought. The former just seems to arrive at a ridiculous and unreasonable result.

[PensionPro]

From the 1996 ASPA meeting:

ASPA: What is the deposit due date for a top-heavy contribution to a profit sharing plan? (For example, where a DB plan also exists and the profit-sharing plan provides the top heavy minimum.)

IRS: This is not a 412 issue, but it is a qualification issue. Therefore, probably need to fund the contribution by the 404(a)(6) due date (include extensions).

[movedon]

I agree it's gray, but I lean toward the first interpretation.

However, I think there's an exception in the 415 crediting deadline rules about make-up contributions to correct failures. Not sure that's really defined anywhere, but if you take the position that the top heavy allocation is such a corrective type allocation, then it would be an annual addition for 2009. I believe I'd hang my hat on that.

[PensionPro]

Courtesy of the EOB:

1.a.Examples illustrating the 415 crediting deadline.

1.a.1)Example - return not on extension. Corporation X maintains a profit sharing plan. The limitation year is the calendar year. X's tax year also is the calendar year. The IRC §404(a)(6) period for the 2010 tax year ends March 15, 2011. The 415 crediting deadline for the 2010 limitation year is April 14, 2011 (i.e., 30 days after the IRC §404(a)(6) period for the 2010 tax year). Employer contributions made by April 14, 2011, that are allocated as of a date in the 2010 limitation year are annual additions for the 2010 limitation year. But employer contributions made after April 14, 2011, that are allocated as of a date in the 2010 limitation year would be treated as annual additions in the year made (i.e., for the 2011 limitation year), not as annual additions for 2010.

[Belgarath]

Thanks for the replies. I think I like Lippy's approach for this specific situation, as Appendix A .02 of RP 2008-50 says the correction is to make the TH contribution. So you make it, and it is subject to normal deduction rules under 404 - which in this situation means you deduct it for 2010.

[Tom Poje]

lets suppose Fred was due a top heavy contribution for 2009 of $1000. He quit 1/2/2010, so the comp in 2010 is minimal.

if you go strictly by rule that you switch to a 2010 for annual addition, then you can't give the guy the top heavy because you violate 415. that makes no sense. I'd lean toward Lippy the Lion's approach. (har-de-har-har)

[Tom Poje]

this is somewhat similar to a Q and A for the ASPPA conference this year[just pulled off the notes for this year]. instead of top-heavy, it is in regards to the 3% safe harbor

IRS response

Contributions made after the Section 415 timing date of 30 days after the tax return due date are

considered to be annual additions for the following year. However, if consider the contribution a

self-correction under EPCRS, it is permissible to relate this back to the earlier year. If the

contribution is made after 12/31, you are clearly under EPCRS. [One of the exceptions to the

415 timing rule is an erroneous failure to allocate. See Treas. Reg. 1.415©-1(b)(6)(ii)(A).

EPCRS clearly treats post-415-period deposits that relate back to a prior plan year as an annual

addition for the year to which it is meant to be paid, but EPCRS applies only after the 12/31/09

deadline. Therefore, there is a lack of guidance for the period between 30 days after the tax

return due date and the end of the 12-month regulatory correction period.]