ESOP Contributions after year end

[Guest AG]

We have a calendar year 1999 ESOP client where all the required loan payments were made on time through 12/31/99.

The client is asking if an addtional contribution can now be made for the 1999 Plan Year.

We have calculated the 415 and 404 limits for 1999 which exceed the contributions made during calendar year 1999 which were applied toward debt reduction. The ESOP loan documents allow addtional payments towards principal.

Can an contribution be made now and deducted and allocated for 1999? Would it be 100% applied towards principal reduction (assuming continuing loan payments are up to date)? How would the additional payment affect the future loan payments and release schedule?

thanks for your help.

[RLL]

IRC Sec. 404(a)(9) permits contributions to be deducted for a taxable year if made to an ESOP and applied by the ESOP for payments on an ESOP loan by the due date (including any extension) for filing the company's federal income tax return for that year. It is the position of the IRS, however, that contributions paid after the close of the taxable year can be deducted for the prior year only to the extent applied to loan principal or to interest accruing during the taxable year. Such contributions which are deducted for a taxable year must be treated under the ESOP as having been made on the last day of that taxable year, thus resulting in additional allocations to participants' accounts. Prepayments on an ESOP loan will result in a reduction of future loan payments in the manner set forth in the loan documents.

[This message has been edited by RLL (edited 02-06-2000).]

[Guest AG]

Thanks.

So if an extra payment is made on March 1, 2000, (over and above the scheduled payment), could it be applied entirely to the current principal balance, and included in the 1999 release formula? Is this OK even though the January and February 2000 scheduled payments were already made and amortized against the loan? They will be used in the 2000 release formula.

[RLL]

Yes.