Late Deposit of Safe Harbor

[Dougsbpc]

A small safe harbor 401(k) plan timely distributes the 3% SHNEC notice on November 15, 2009 for the 2010 calendar plan year.

The employer filed the corporate tax return 3/15/2011 and did not fund or deduct SHNECs. In fact, they still have not been funded. He simply forgot, even though we told him to back in January.

My understanding is that SHNECs can be funded up to 12 months after the end of the plan year. So if they are are funded this week:

1. Do any earnings need to be calculated and funded for the late deposit?

2. Would the safe harbor contribution be deductible for 2011 or 2012? If 2011 he will need to amend the corporate tax return.

Thanks.

[ETA Consulting LLC]

1) It must be made.

2) It is clearly not deductible for 2010, but is deductible for 2011 since it is funded during 2011 after the 2010 tax filing deadline.

Your issue is whether this amount will be considered a 415 annual addition for 2010 (the year of intent) or 2011 (the year of deposit) since you are beyond the 2010 415 funding deadline.

I would argue that this is a 415 annual addition for 2010 since it was not made due to a mistake by the employer. Otherwise, how could you reasonably justify meeting the safe harbor requirements in the event an employee terminated employment during 2010 with zero compensation in 2011.

I see no reason for an earnings calculation as there may not be a precedent to establish the time frame during which such calculation should be made. It's not the same as "as soon as administratively feasible after amounts are withheld from employee pay". It's also not the 8 1/2 month "Pension funding" deadline. So, any other time period would seem arbitrary.

Good Luck!

[Kevin C]

Employer contributions must be deposited by 30 days after the due date for the employer's tax return to be considered annual additions for the year. See 1.415©-1(b)(6)(i)(B). Your document probably includes this in the 415 provisions. The only exception I know of is in EPCRS.

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.

You should also check the document to see if it has a deadline for employer contributions. It is fairly common for documents to say the employer contribution must be deposited by the due date for the employer's tax return including extensions. Even if it doesn't, the 415 issue should put you under EPCRS. We've corrected this way a couple of times and included lost income from the due date of the employer's tax return, including extensions to the deposit date.

[Dougsbpc]

Thanks for the replies

I don't see where this would be a 415 problem as this plan only has two participants and they only ever intend to make small employer contributions. So for 2011 they will make a safe harbor and employer contribution of 3% of salary. That would not bring any participant close to their 415 limit for 2011 even though we need to also include the 3% safe harbor that was intended for 2010.

[TPApril]

Slightly different scenario and question, though related to late deposit of safe harbor -

3% nonelective safe harbor is deposited for staff on a payroll basis. Owner (and only HCE) has not deposited for himself any amount for both 2010 and 2011.

Assumptions:

2010 - should be deposited as soon as possible with calculation of lost earnings (through vfcp calculator?), though technically, owner has until 12/31/12 if not audited.

2011 - should be deposited by tax deadline (if extended) of 9/15/12. But considering that it is paid on payroll basis to staff, would it be different? (I read somewhere that for safe harbor match the deadline would be end of following quarter, so would 3/31/12 be best deadline?)

For either year, I dont think it necessarily makes a difference at this point if they are deposited before or after 12/31/11.

Any thoughts, much appreciated.

[K2retire]

It is potentially discriminatory to deposit his contribution at a different time than the staff.

The old school of thought was that being in the market longer gave the recipients of the early deposit an unfair earnings advantage. In this market, it might be possible that staying out of the market gives the recipients of the late deposit an unfair advantage to avoid a loss. (clearly, who has the advantage is not predictable)

Encourage him not to continue this practice!

[TPApril]

Different plan - professional firm with multiple partners who are HCE but not Key.

One partner declares annual 401(k) deposit in full from one paycheck during the year, and then pays it to the plan over a month later. This is the only late deferral in the planyear . Is it discriminatory then to have her pay lost earnings on her own deposit? Does it need to be included as late in the 5500 since she is a Partner in the LLP?