Calculation of earnings on missed TH contribution

[Richard Anderson]

We have a takeover that the prior TPA missed that the plan was top heavy in 1995 and 1997.

When I calculate the earnings on the 1995 TH minimum contribution, at what date do I start the earnings? Do I use the latest date that the contribution could have been deposited for deductibility purposes?

Do I include the earnings in the 404 limit?

[Ervin Barham]

See Rev Proc 99-31. It has a lengthy discussion on earnings.

[Richard Anderson]

Revenue procedure 99-31 is specific on the date when earnings should began only for two cases.

1. If one eligible employee is excluded from a plan contribution that was made.

2. Exclusion of an emplyee from deferrals and the related match.

The general rule stated in rev proc 99-31 is "the "period of the failure" is the period from the date that the failure began through the date of correction."

When did the failure begin for a missed TH minimum contribution for the plan year ended 12/31/95?

I believe that the 95 TH contribution could have been made on any date between 1/1/95 and 12/31/96, and no failure would have occurred.

If the above is correct, did the failure begin on 1/1/97?

[Ervin Barham]

I don't have a specific cite for your question. This is one of those that you would have to argue with the IRS that your methodology is correct - and they might argue it is not!

I'm not following your 12/31 argument. Some of my material indicates that earnings are credited from the date the Employer should have made the contribution. Under normal circumstances, wouldn't it have to be made by the tax return due date (9/15 for calendar year plan) rather than 12/31?

In any event, you (or the employer) would have to demonstrate that your argument is reasonable.

[Richard Anderson]

It would have to be contributed by 9/15 of the following year in order to deductible in the prior tax period.

But, I believe that the plan has until 12/31 of the following year to make the TH contribution before it is no longer qualified.

If the 1995 TH contribution was made by 9/15/96 it would be deductible in 1995. If made between 9/16/96 and 12/31/96 it would be deductible in 1996, but it would be timely contributed for qualification purposes. Therefore, I think the "failure" began on 1/1/97.

[John A]

Richard, for additional info., see Q&A 62 in the Benefits Link Correction of Plan Defects Q&A Column.