Deduction issue?

[pixmax]

Taking over a 401k plan. Plan effective date 1/1/2014-12/31/2014. Clients fiscal year is 2/1-1/31.

Plan Compensation is W2 and the compensation computation period is paid to participant during the plan year eligible.

Client mentioned that they put in a $75000.00 contribution in May of 2014. This Profit Sharing Contribution was deducted on their tax return for 1/31/2014 and was based on participants compensation for 2013.

1. Could they do this? My thought is that they should have matched the plan year with the fiscal year and have put in a contribution based on compensation from 1/1/14-1/31/14.

2. I am now asked to allocate PS for their fiscal year of 1/31/15 based on 2014 compensation. Do I need to change the definition of compensation in the plan document? Or do I add both contributions together for 2014 and make sure that 415 is satisfied?

[Mike Preston]

When was the plan document signed?

[pixmax]

We only have the SPD, still waiting on the signed document.

[david rigby]

We only have the SPD, still waiting on the signed document.

Uh-oh.

[Mike Preston]

I'm biting my tongue.

[pixmax]

What are your thoughts signed before 12/31/13 and thoughts signed after 1/1/14? What issues are the client facing?

[Mike Preston]

My thoughts are that I don't have time for a dissertation. Maybe somebody else does. Get the facts and then you'll see if somebody has the time to revisit this topic.

[pixmax]

Gee thanks, why be a moderator if you can't give insight.

[rcline46]

My dear pixmax - not only have these issues been discussed at length on this board - there is a wonderful tool to let you read all of them - its called SEARCH.

Also, you are asking someone to give you detail on two radically different items. The fact that the plan years and fiscal years do not match is a whole series of issues by itself.

So get us the factual details wo we won't confuse you.

[pixmax]

I understand the 25% limit based on tax-year compensation. I'm assuming that if they signed the Plan Doc prior to 1/31/14, then they could take a 25% deduction based on compensation from 2/1/13-1/31/14. However all compliance tests would be based on plan year compensation (1/1/14-12/31/14) correct? I haven't heard back from the client on date of document signed, I am just trying to be prepared for the conversation. My initial suggestion is to amend the Plan Year to follow with the fiscal year.

[Mike Preston]

Gee thanks, why be a moderator if you can't give insight.

Seriously? Have you absolutely no clue as to how this message board operates?

I did give insight. I said that there is critical information missing that is necessary to have before a targeted discussion will be fruitful from my perspective. I even allowed for the possibility that somebody else might have a different perspective and therefor the time for a less focused discussion. But most importantly I gently prodded you to provide the facts needed for a targeted discussion before having the expectation that others can provide useful commentary.

If this isn't clear, then by all means poke the bear one more time. You might find the response entertaining. Then again, you might not.

[austin3515]

Let me see if I can help. I will assume the plan document was signed before 12/31/2013.

For the 12/31/2013 plan year, contributions are allocated based on 2013 compensation, assuming that is what the plan says (I'd be very surprised if it did not). What the fiscal year of the employer is irrelevant with respect to how to allocate the contributions.

The next question is what return is the 2013 contribution deducted on. The 404 rules require that the deduction taken be allocated as of a date within the fiscal year. So the 1/31/14 return can deduct the contribution allocated as of 12/31/2013. The due date for that contribution to be eligible for a deduction is based on the fiscal year, so the contribution would be due April 15th 2014 (assuming it is a corporation) with an extended due date of 10/15/2014 regardless of the form of entity. When determining compliance with the maximum deductible rules, the max is based on compensation paid during the taxable year. I am a little unclear on how precisely that is done, but as long as the compensation levels are similar and you are not bumping right up against the 25% limit I would not worry too much about that. So for example if 75,000 = 4% of eligible wages in the plan year, I don't think you need to concern yourself unless there was some extenuating circumstance that would contradict this otherwise reasonable assumption.

[austin3515]

However all compliance tests would be based on plan year compensation (1/1/14-12/31/14) correct?

Correct. Fiscal year is only relevant for max deductible and when the contribution must be funded,

[pixmax]

Thank you Austin. Mike I'm not offended and have no problem poking the bear. I've done the research and understand the tax deduction. My concern is that this was a start up plan effective 1/1/2014, I'm just trying to figure out if using prior year compensation before the plan is effective is allowed to allocate contributions. The Plan certainly does not state this fact. Once I get the exact sign date of the document I will come back and get more insight.

I thank you and appreciate this board discussion. I don't use the message Board often but sometimes I need to brainstorm with others to gather all of my thoughts.

[austin3515]

concern is that this was a start up plan effective 1/1/2014

I missed this part of the statement. No contribution for 2013. Plan has to be effective in 2013.

[pixmax]

I finally received a copy of the signed plan document. The Plan is effective 1/1/14 as a safe harbor maybe and signed 11/26/2013. The clients fiscal year is 1/31.

[Mike Preston]

What does the plan say about allocation dates? There is a general prohibition on taking a deduction on any amount attributable to future periods. See the 401(k) and 401(m) regs for citations. So, if there were no plan allocation dates between 1/1/14 and 1/31/14 there simply is nothing to deduct on the 1/31/14 tax return. If there are monthly allocation dates then perhaps some portion of the 5/14 contribution is deductible on the 1/31/14 tax return. If the client insisted on deducting it I would want a hold harmless, at the least. But more probably I would recognize the client as Trouble with a capital T and resign (or not accept the takeover).

[pixmax]

I feel the prior TPA gave them misguided information as they prepared the allocation for them. I feel the plan year should have been a short plan year 1/14-1/30/14 and then moved to a plan year that matched their fiscal year. 2/1/14-1/31/15. Thank you for your insight and I will read more on this.