Profit Sharing Declared bu Not Funded

[austin3515]

Board approved a profit sharing contribution of 5% of pay but cash flow turned around (and is now very bad). Can someone point me to something that will clarify that the discretionary nature of the contribution survives this resolution and can therefore be eliminated/reduced to zero? Obviously the contribution has not been funded yet.

An attorney once answered this question in a very straightforward manner: "The contribution is discretionary."

[Lou S.]

I agree with the attorney.

I have nothing definitive to point you to.

Though we have had clients back out of a PS contribution or discretionary match in the past under similar circumstances.

[jpod]

I don't think it's such an easy answer. First, you need to make sure there is no language in the plan indicating that a resolution by the Board fixes the contribution and is not revocable. Assuming you get over that hump, I would consider other factors, such as what if anything has been communicated to participants and past practices, or whether the 5% contribution is necessary to meet 401(a)(4) requirements where there is aggregation with a DB plan.

[austin3515]

This is much more plain vanilla. There won't be any profit sharing so there is no testing. And there is no DB Plan. The document has no language regarding board resolutions fixing the contribution. It merely says "a discretionary contribution to be determined by the Employer."

Good point on participant communications. In this case, nothing was communicated one way or the other. However, if you want to go down that road, when I consulted the attorney in the past he indicated that although it is not a good employee relations policy, there is no legal obligation to make a contribution merely because you said you would. Saying you will do something that is explicitly discretionary does not make it mandatory. Nowhere does the plan document ever provide for a mandatory contribution (aside from THMs). So since no language in the document ever crystalizes the discretionary contributions, it can be revoked.

Like I said, I am hoping for something like an ASPPA Q&A or perhaps a Relius article on the topic, but I certainly appreciate your opinions from such esteemed contributors!

[jpod]

A Plan is a contract; a unilateral contract but still a contract. The Board's resolution will be relevant in interpreting the contract. I am not suggesting an answer but only suggesting a line of inquiry. I am hoping that we are talking about a calendar year plan in which case I would urge that the Board rescind its resolution before the end of the year, either at a duly convened meeting or by Unanimous Written Consent if the state law in question and the corporation's governing documents permit action without a meeting. If we are beyond the close of the plan year I think the potential risk here is significant.

[austin3515]

Good point, and now allow me to use it against you! The value of a contract of course is that you are only obligated to do what the contract says. And the contract does not make it mandatory

But enough of that already. I see your point and it is a good one...

[Tom Poje]

perhaps somewhat similar, from 2007 Q and A

Q19) Safe Harbor 401(k): A notice is issued indicating a safe harbor contribution will be made for the upcoming year, but the plan was never amended to contain safe harbor language. Now that it is after plan year end, it is too late to amend to correct the problem. Is the plan on the hook for the contribution, and must also run all appropriate tests?

A: Notwithstanding the notice provided, the plan terms do not provide for the safe harbor plan. Therefore, you should follow the plan terms and run the ADP test as needed. (Whether there is a Title I issue due to the notice is in the purview of the DOL.)

........

so since the contribution is discretionary, not making one is still following the terms of the document. were the participants informed of the board's decision to make a contribution? possibly the answer is similar to the above, that there may be an issue with the DOL,

in your particular case, arguably, the board has reviewed the situation and rescinded its earlier decision to make a contribution, which also seems possible.

[BG5150]

I'm not sure if this matters, but did the company deduct the amount on its taxes?

[austin3515]

You can only take the deduction if the contribution is funded. In this case it was not deducted. If it had been, then certainly an amended return would be required since the tax return claimed an ineligible deduction. But I think that is a non-direct relationship to the original question.