Which Plan Year

[justatester]

I have a client that gave a $500 employer contribution to employees. I am trying to figure out which plan year it belongs to. The client is insisting it is a 2010 contributon, but the client gave the $500 to employee who were hired in Jan. 2011 as long as they were employed as fo 1/24/11. My thinking is the last allocation condition was int 2011 so it would be a 2011 plan year contribution. Is it possible it is both a 2010 and 2011 contribution. Because they also gave the contribution to some employees who termed in late 2010. I am not comfortable calling in it a 2010 Plan Year contribution since at least some of the EEs were not even hired until 2011.

Any thoughts would be greatly appreciated.

[ESOP Guy]

What compensation did he use for the allocation? Just 2010, 2010 plus a little 2011? Or did he give $500 per person without reference to comp?

[justatester]

It was $500 without regards to compensation.

[david rigby]

It might be both. Clearly, no 2010 contribution can be allocated to employees who were not participants (we're assuming the PY=CY) in the 2010 PY.

But this is 2012; why are we discussing a 2010 PY contribution? Might be some other relevant facts?

[justatester]

When completing the 2011 test, we were told it was a 2011 PS contribution. It did not pass coverage (on a prototype document so no ABT). We went back to the client and asked him to review the population. He then said it was for 2010 and it was not initially included in 2010 test. . Additionally, there is a last day requirement which they are counting as 1/24/11. If I count as 2010, would those hired in 2011 have 415 excesses? Clearly, the client is not really following the terms of the plan. I am not sure which is his best course of action.

[ESOP Guy]

I think his best case is he has both. And I suspect he needs to give people more for 2011-- namely those people who got a cont for 2010 but not for 2011 that met the requirements.

More likely is he simply isn't following the terms of the document. I doubt an document just allows them to pick any day in the year and say that is the allocation day.

Deep down I think he needs an ERISA attorney.

I am not a big fan of recommending people to walk away from business, but unless the client is willing to get the needed legal help to fix this you might want to think about walking away from this one. It is quickly sounding like this client is going to be more trouble then you can recoup in billing. I think they need a VCP to fix this.

[Kevin C]

When was the employer contribution deposited? In order for it to be counted as an annual addition for 2010, with calendar plan and fiscal years, it must be deposited within 30 days of the due date for the 2010 tax return, including extensions. See 1.415©-1(b)(6)(i)(B).

Does the plan allow a $500 per person contribution?

[justatester]

Some more information that I have received:

The plan amended effective 1/1/11 to allow for a flat dollar amount and removed the last day provision. The plan funded the contribution on 1/28/11 then an additional contribution on 3/1/11 for 12 additional participants who were hired in the first 3 weeks of Jan.

Then amended the plan effective 3/1/11 adding back the last day requirement.

This whole thing seems a bit fishy to me.

[BG5150]

^^ well, you can't do that. You cannot change allocation conditions in the middle of the year once people have satisfied the original condition.

Seems like an odd way to go about giving people such a small contribution to their retirement account.

Who is responsible for the plan document? Did they do the amendment themselves?

[BG5150]

And by any chance were these 3 people HCEs or are going to be HCEs?

[GMK]

The award for insightful analysis of this plan's little maneuver goes to:

This whole thing seems a bit fishy to me.

[Kevin C]

The plan amended effective 1/1/11 to allow for a flat dollar amount ...

So, how can it be a 2010 contribution if a flat dollar contribution wasn't allowed until 1/1/11?

My crystal ball says you will soon become very familiar with Rev. Proc. 2008-50.

[justatester]

ok...So we have (at least internallly) agreed this is a 2011 Plan Year Contribution.

So, my question now is: I am being told that (even on a prototype document) that the allocation formula (flat dollar) is set by the plan document-however, the amount and the allocatin date is within the discretion of the plan administrator. Is the correct? It seems to go against the spirit of the prototype document.

Here is the opening language in the document.. "A participant will share in the Emloyer Regular Profit Sharing Contribution for a Plan Year if (and only if) he/she is an Active Participant in the Employer Profit Sharing Component at some time during the Plan Year..." The rest of the section does say you have to be employed by a certain date or set any other allocation conditions. Can the employer do this? If so, how do I count the people hired after the 1/24/11 date that was set and still employed as of 12/31/11?

[BG5150]

The contribution amount is determined by the employer, at its discretion (usually). $80,000. 5% of total compensation. $800 per person.

Then you take that total dollar amount, and allocate it per the terms of the document. Pro rata, new comp formula, per capita. Sometimes, the allocation must pass the General Nondiscrimination test.

The two, contribution amount and allocation can be different numbers. To wit: ER wants to make a 10% of compensation to the PLAN, and the total comp is $1,000,000. It would be a $100,000 contribution and deduction for the ER. But, that doesn't mean everyone must get 10% of his or her compensation for the year. The allocation method could include permitted disparity, wherein the higher paid people would get slightly higher than 10% and others slightly lower than 10%. The total will still be $100,000 though.

The allocation method will also tell you the conditions under which someone will get a contribution. Things such as dates of employment (mid-year dates are very odd) like the last day rule, or working a requisite # of hours, etc.

The ER will NOT have discretion in the allocation method for a year, once someone has accrued the right to a contribution. He can change it prospectively, for the next year.

[justatester]

Thanks for your response...

SO I am hired 7/1/11 and still employed as of 12/31/11 (Plan has no age/service requirements and immediate entry). Am I entitled to the 2011 contribuion of $500?

The plan says no since I was not hired by 1/24/11, but I say yes, because that date is not an allocation condition stated in the document.

[BG5150]

The plan amended effective 1/1/11 to allow for a flat dollar amount and removed the last day provision. The plan funded the contribution on 1/28/11 then an additional contribution on 3/1/11 for 12 additional participants who were hired in the first 3 weeks of Jan.

Then amended the plan effective 3/1/11 adding back the last day requirement.

What was the allocation formula in place before 1/1/11? The 2010 contribution must be broken up and allocated on the pre- 1/1/11 basis.

Starting 1/1/11, they made the allocation formula per capita, with no last day rule or other requirements (such as hours worked). They are stuck with that for 2011, because all the participants on 1/1/11 satisfied the requirements. If the PS ELIGIBILITY requirements (that is, just to be eligible for the PS component of the plan to begin with) are none (no service or hours req'ment and immediate entry), then anyone hired in 2011 would have to get the per capita amount, too.

The amendment adding back in the last day requirement would be affective for the 2012 plan year.

As for your question about being hired 7/1/11: I would say the person would share in the per capita PS.

[justatester]

So, I am being told that prototype documents are permitted to have an allocation date. AND, it does not have to be in the plan document in would be in the board resolution. This does not seem correct.

So the plan is failing the ratio test (the document does not permit the use of the ABT test). The correction method as directed by the document is to move the "last day" back to include enough employees until the test passes. However, they are not failing for that reason...they are failing since the did not give the contribution to anyone hired post 1/24/11. So what would the correction method be. My first thought is they should give the contribution to all employees hired post 1/24/11 and still employed....which I am getting push back on. The plan would then pass.

Thoughts?

[BG5150]

So the plan is failing the ratio test (the document does not permit the use of the ABT test). The correction method as directed by the document is to move the "last day" back to include enough employees until the test passes. However, they are not failing for that reason...they are failing since the did not give the contribution to anyone hired post 1/24/11. So what would the correction method be. My first thought is they should give the contribution to all employees hired post 1/24/11 and still employed....which I am getting push back on. The plan would then pass.

Thoughts?

If they didn't do it right the first time, the test isn't failing, it's an invalid test to begin with.

Figure out who should have received it using the provisions in the plan document. Anyone missed gets it. Everyone missed gets it. Then run the ratio test.