Establishing a new profit sharing plan (no CODA)....

[Lori H]

...when does the document have to be in place? Lets say for a new 2010 calendar year end plan. Before they fund the plan?

[Guest Sieve]

New PSP must be established by year-end to be in place for all of the year (i.e., by 12/31/2010 to be in existence for 2010). Must also provide SPD (or something comparable) to employees by year-end. However, funding not required by year-end for IRS purposes (although, in some states, there is no valid trust without a corpus, so it might also make sense to put something in the trust--say $1,000--by year-end).

[ERISA11]

Could you tell me what legal authority provides that the PSP (without a CODA) must be established by year-end? And is the deadline the end of the plan year or the end of the taxable year of the employer? I have only found authority under Treas. Reg. sec. 1.401(b)-1(a), which provides that section 401(b) does not permit a plan to be made retroactively effective, for qualification purposes, for a taxable year prior to the taxable year of the employer in which the plan was adopted by such employer. I've seen several commentaries (and prototype documents) that indicate that the plan must be adopted by end of the plan year, but so far I haven't been able to find any legal authority for that deadline. Any guidance you (or anyone else) could give would be very much appreciated.

New PSP must be established by year-end to be in place for all of the year (i.e., by 12/31/2010 to be in existence for 2010). Must also provide SPD (or something comparable) to employees by year-end. However, funding not required by year-end for IRS purposes (although, in some states, there is no valid trust without a corpus, so it might also make sense to put something in the trust--say $1,000--by year-end).

[Guest Sieve]

Rev. Rul 57-419 requires the trust to be in existence before the end of the year in which it is to be effective:

http://www.legalbitstream.com/scripts/isys...y/irl1190/1/doc (Also see Rev. Rul 59-402: http://www.legalbitstream.com/scripts/isys...y/irl11a4/1/doc)

Also, Treas. Reg. Section 1.401-1(a)(2) has been interpreted to mean that a plan is not in place for a year unless it is in writing (not required, necessarily, to be signed) and has been communicated to employees during that year.

Plus, your cite says it all: your can't make a plan effective for a taxable year prior to the taxable year in which it was adopted--i..e, no deduction in that prior taxable year. So, if you want a deduction for the taxable year of 1/1-12/31/2010, the plan must be in place (as described above) by 12/31/2010. Of course, other rules apply for the ability to defer into a 401(k) plan--basically, you cannot defer amounts paid before the 401(k) provisions are physically adopted.

[ERISA11]

Thanks, Sieve. I am still wondering, though, if the taxable year of the employer ends later than the plan year, does the plan have to be adopted by the end of the plan year or does it just have to be done before the end of the taxable year of the employer. (Although adoption by the end of the plan year would obviously be the safest course, I am looking at the issue in hindsight.) Treas. Reg. 1.401-1(a)(2) doesn't indicate a deadline for the written document. Do you know of any IRS guidance (formal or informal) interpreting that regulation that would clarify whether the deadline is the plan year or the taxable year of the employer?

If not, must we conclude that the deadline is the end of the plan year based on the cited Revenue Rulings (which, in connection with analyzing the deductibility of contributions under section 404(a), appear to require that the trust be established by the end of the trust's taxable year, i.e., the plan year), or is it reasonable to rely on 1.401(b)-1 and take the position that the deadline is the end of the employer's taxable year? Despite the Revenue Rulings, it seems that going with the deadline in 1.401(b)-1 would be consistent with the current terms of section 404(a) of the Code. However, the effect of the language in 1.401(b)-1 is not entirely clear because it is phrased in the negative, rather than the positive. It just seems like the drafters of the regulations must have been basing that language on a deadline that exists somewhere else.

I realize there may not be a clear answer to this question, but, if you have any additional thoughts, I would love to hear them. Thanks again.

Rev. Rul 57-419 requires the trust to be in existence before the end of the year in which it is to be effective:

http://www.legalbitstream.com/scripts/isys...y/irl1190/1/doc (Also see Rev. Rul 59-402: http://www.legalbitstream.com/scripts/isys...y/irl11a4/1/doc)

Also, Treas. Reg. Section 1.401-1(a)(2) has been interpreted to mean that a plan is not in place for a year unless it is in writing (not required, necessarily, to be signed) and has been communicated to employees during that year.

Plus, your cite says it all: your can't make a plan effective for a taxable year prior to the taxable year in which it was adopted--i..e, no deduction in that prior taxable year. So, if you want a deduction for the taxable year of 1/1-12/31/2010, the plan must be in place (as described above) by 12/31/2010. Of course, other rules apply for the ability to defer into a 401(k) plan--basically, you cannot defer amounts paid before the 401(k) provisions are physically adopted.

[Guest Sieve]

Do you have specific facts that you're working with that might give the issues a reference point?

[John Feldt ERPA CPC QPA]

Must also provide SPD (or something comparable) to employees by year-end.

What is the cite that supports this SPD deadline?

[Guest Sieve]

Look at the 2nd paragraph of post #4 (& Rev. Rul 59-402, cited in the 1st paragrapyh). It doesn't have to be a full SPD.

There used to be 3 requirements for the plan's 1st plan year: (1) significant plan provisions in writing (need not be a signed document--I've received IRS approval without a signed document, but a written summary of plan provisions), (2) communication to employees (full SPD not necessary), & (3) some $$ in the trust. Item #3 not necessary for IRS purposes any longer. To the best of my knowledge, however, other 2 are still in place.

[four01kman]

Sieve, your recollection is the same as mine. Trust is required to be in existence before Plan Year End, but Trust is not required to be funded. I always was under the impression the governing body (Board) had to approve the adoption of the Plan by Plan Year End, and the major plan provisions had to be communicated to employees.

[ERISA11]

The profit sharing plan was adopted after the end of the plan year in which it said it became effective but before the end of the employer's taxable year. The employer had the plan drafted, just didn't sign until after the end of the year. I believe there also were no board resolutions adopting the plan prior to the end of the year.

I noticed in your last post that perhaps the signature is not essential as long as the document terms are written by the end of the plan year. But it seems like some official company action towards adopting the plan (i.e., board resolutions) would be necessary by whatever the applicable deadline is, right?

Do you have specific facts that you're working with that might give the issues a reference point?

[Tom Poje]

You could start with the following rev proc which clearly states discretionary plan amendments must be in place before plan year end. (Because of law changes, there are required amendments that could be adopted at a later date but those would be for existing plans)

Rev Proc 2005-66 5.05(3) An employer (or a sponsor or a practitioner, if applicable) will be considered to have timely adopted a discretionary plan amendment (that is, a plan amendment not described in section 5.01), if the plan amendment is adopted by the end of the plan year in which the plan amendment is effective

The IRS Publication 560 words it as follows:

Set-up deadline. To take a deduction for contributions for a tax year, your plan must be set up (adopted) by the last day of that year (December 31 for calendar year employers).

the one exception to the rule would be a SEP, notes from the DOL website:

SEP Retirement Plans For Small Businesses

A SEP may be established as late as the due date (including extensions) of the company’s income tax return for the year you want to establish the plan. For example, if your business’s fiscal year (a corporate entity) ends on December 31 and you filed for the automatic 6-month extension, the company’s tax return for the year ending December 31, 2009, would be due on September 15, 2010, allowing you to make the initial SEP contribution no later than September 15, 2010.

[John Feldt ERPA CPC QPA]

Here's 1.401-1(a)(2)

A qualified pension, profit-sharing, or stock bonus plan is a definite written program and arrangement which is communicated to the employees and which is established and maintained by an employer—

(i) In the case of a pension plan, to provide for the livelihood of the employees or their beneficiaries after the retirement of such employees through the payment of benefits determined without regard to profits (see paragraph (b)(1)(i) of this section);

(ii) In the case of a profit-sharing plan, to enable employees or their beneficiaries to participate in the profits of the employer's trade or business, or in the profits of an affiliated employer who is entitled to deduct his contributions to the plan under section 404(a)(3)(B), pursuant to a definite formula for allocating the contributions and for distributing the funds accumulated under the plan (see paragraph (b)(1)(ii) of this section); and

(iii) In the case of a stock bonus plan, to provide employees or their beneficiaries benefits similar to those of profit-sharing plans, except that such benefits are distributable in stock of the employer, and that the contributions by the employer are not necessarily dependent upon profits. If the employer's contributions are dependent upon profits, the plan may enable employees or their beneficiaries to participate not only in the profits of the employer, but also in the profits of an affiliated employer who is entitled to deduct his contributions to the plan under section 404(a)(3)(B) (see paragraph (b)(1)(iii) of this section).

I emphasized the communication to participants, but I do not see the phrase "by year-end" - where is that cite found?

[Guest Sieve]

Here's Rev. Rul. 72-509 in its entirety. It's pretty clear on the requirement to communicate the plan to employees before the end of the year:

"Advice has been requested whether, under the circumstances described below, an arrangement qualified as a profit-sharing plan under section 401(a) of the Internal Revenue Code of 1954 prior to the year in which it was communicated to the employees.

"An arrangement intended to qualify as a profit-sharing plan was reduced to writing and approved by the board of directors of a calendar year taxpayer on December 29, 1970. However, the employees to be covered under the plan were not informed of its existence until March 1, 1971.

"Section 1.401-1(a)(2) of the Income Tax Regulations provides that a qualified plan under section 401(a) of the Code is a definite written program and arrangement which is communicated to the employees and which is established and maintained by an employer for the purposes specified in that regulation. Since one of the essential elements of a qualified plan, as described in section 1.401-1(a)(2) of the regulations, is that it be communicated to the employees, a qualified plan does not come into existence until the essential element of communication is satisfied.

"Since the plan in this case was not communicated to the employees in the employer's taxable year 1970, it is held that the plan did not qualify under section 401(a) of the Code in that taxable year."

[ERISA11]

Thank you. This is very helpful.

You could start with the following rev proc which clearly states discretionary plan amendments must be in place before plan year end. (Because of law changes, there are required amendments that could be adopted at a later date but those would be for existing plans)

Rev Proc 2005-66 5.05(3) An employer (or a sponsor or a practitioner, if applicable) will be considered to have timely adopted a discretionary plan amendment (that is, a plan amendment not described in section 5.01), if the plan amendment is adopted by the end of the plan year in which the plan amendment is effective

The IRS Publication 560 words it as follows:

Set-up deadline. To take a deduction for contributions for a tax year, your plan must be set up (adopted) by the last day of that year (December 31 for calendar year employers).

the one exception to the rule would be a SEP, notes from the DOL website:

SEP Retirement Plans For Small Businesses

A SEP may be established as late as the due date (including extensions) of the company’s income tax return for the year you want to establish the plan. For example, if your business’s fiscal year (a corporate entity) ends on December 31 and you filed for the automatic 6-month extension, the company’s tax return for the year ending December 31, 2009, would be due on September 15, 2010, allowing you to make the initial SEP contribution no later than September 15, 2010.

[John Feldt ERPA CPC QPA]

Nice. Is this written such that it only has teeth for profit sharing plans, or do you think it also would apply to a money purchase plan, a target plan, or how about a Defined Benefit plan?

Edited to clarify: I mean Rev. Rul. 72-509

[Guest Sieve]

The only cite in the Rev. Rul. was to the reg, which is not specific to PSPs but to qualified plans as a group.

I would say it applies even more so (if that's possible) to plans subject to 412. The argument for PSPs probably was that contributions are disrectionary, so you may not really know until well after plan year end that there will be contributions, so why do you have to communicate to employees by year-end--I think that's why a PSP was chosen for the Rev. Rul. (It's so short, it must be an Ira Cohen Rev. Rul.)

[John Feldt ERPA CPC QPA]

Great - thanks!