New plan trust funded before year end?

[Purplemandinga]

We are setting up a money purchase plan for 2018 that will not have actual allocations made to the plan prior to 12/31/2018. The actuary is suggesting that a nominal amount be contributed to the plan prior to 12/31/2018 to establish the trust.

Is this a thing? Can someone point me to the regulation or guidance on why this would need to be done? Does it apply to all plans or is it special to plans subject to minimum funding requirements?

Thanks in advance

[Bird]

1 hour ago, Purplemandinga said:

Can someone point me to the regulation or guidance on why this would need to be done?

No.  I'm not sure where it got started but it is urban legend.  Ask the actuary to provide a cite.

[Belgarath]

Yeah, this was an issue in "ancient times." Revenue Ruling 81-114 officially recognized this, and referred to Dejay Stores, Inc. v. Ryan, and Tallman Tool & Machine Corp. v. Commissioner.

Not a requirement for a VERY long time. Prior to 81-114, it was an issue under Revenue Ruling 57-419.

No worries! It doesn't HURT to contribute a nominal amount, but seems pointless and unnecessary to me...you can refer the actuary to the citations, but if you need to keep 'em on your side, certainly ok to contribute if they insist.

[jpod]

I agree, but I am jumping in only to mention another point.  In addition to the plan and trust having to be in existence before the end of the year, I think the old IRS guidance that says that the plan must also be communicated to employees before the end of year is still in effect.  However, I am happy to be proven wrong if I am wrong.  

[Belgarath]

Yes, Revenue Ruling 72-509. I'm not aware that this has ever been made obsolete, although it is just plain stupid...

I will say that this "rule" is flung down and trampled upon quite frequently in the real world...

[jpod]

Agree with the "flung down and trampled" observation.  I'm wondering if as part of their training IRS EP agents are even informed of this position any more.  Not sure about the plain stupid comment because I don't remember what the rationale was for the IRS position. 

[Flyboyjohn]

IRS rationale was that taxpayers can't be trusted to not back-date documents and having $100 in a trust bank account provided extrinsic proof that stuff did happen on or before 12/31.

[jpod]

Flybohjohn, I was talking about the rationale behind the requirement that the plan be communicated to employees before the end of the year. 

[Larry Starr]

2 hours ago, Flyboyjohn said:

IRS rationale was that taxpayers can't be trusted to not back-date documents and having $100 in a trust bank account provided extrinsic proof that stuff did happen on or before 12/31.

The actuary is plain wrong, and should know better.  Usually it's an accountant that offers this old chestnut. And there is a rationale for it; a trust cannot exist UNTIL there is a corpus; that is true.

However, there is no requirement that the retirement trust exist (or be funded) as long as the PLAN is in existence, which means the plan (and trust) has been adopted by the end of the year. It can be funded later (by the appropriate funding dates for deduction purposes). Too many of our practitioners don't understand that there are really two separate documents that make up a retirement plan; the PLAN document and the TRUST document.  Most of us write a single document that includes both (usually with an article in the document that is actually the trust document.  That is why the thing is signed BOTH by the employer, and the trustees separately.

[shERPA]

Agree with the others, no such requirement.  And there is a definite downside, especially to an MP plan that will have a specific contribution amount for the year. 

In a prior firm we worked with an advisor who always opened an account with $100 in it before year end.   Problem came up when we later told the client the total contribution for the year they forgot about the $100 and deposited the full amount.  And would repeat this year over year.   Creates more trouble than it is worth (which isn't saying much because opening the account is worth nothing).