Coordination of IRC 415, 412, 404

[Guest mo again]

For plan/fiscal 7/1/99 - 6/30/2000, our client sponsored a 20% money purchase and a profit sharing plan. By 12/31/99, they had already funded almost the whole 15% allowable profit sharing contribution. Now, in order to avoid 415 and possibly 404 problems, they want to fund the money purchase plan at only 10% instead of 20%. Does anyone know if, in the case of two DC plans, 412 takes precedence over 415? I am somewhat uncomfortable about funding less than the "required" amount for the money purchase plan, yet agree that they shouldn't fund over 415 limits. Of course, the plan documents are silent on this subject.

[davef]

Couldn't this problem be avoided if the employer waited until the end of the year to make its profit sharing contribution? If the profit sharing contribution is not discretionary, perhaps it should be.

You indicated that the document is silent on the 412/415 issue. Doesn't it cover what happens if there is a 415 violation and two DC plans are maintained. There is normally some language that coordinates which plan's contribution gets cut back.

That said, in my opinion the rules under 415 will override any minimum funding requirements under 412, since meeting 415 is a qualification requirement, whereas 412 isn't. Failure to satisfy the minimum funding requirements results in an excise tax, but not possible disqualification. Where the 415 limit results in the reduction of the amount to be allocated under a money purchase plan, I would argue that the 415 limit IS the minimum funding limit.

If the contribution formulas under both plans are that generous, it sounds like the employer may continually run into this problem. I would not recommend that the employer regularly violate 415 and then correct by putting amounts in suspense (pursuant to Reg. 1.415-6 methods) since those correction procedures are supposed to be used only when excess annual additions are the result of the allocation of forfeitures, reasonable errors in estimating compensation, etc. It doesn't sound like the 415 violations would be caused by those reasons.

[Guest mo again]

Hi davef,

Yes, the problem could have been avoided, but it wasn't. The sponsor just had the cash on hand and dumped it into the plan without thinking about the limits and, of course, without asking any of their advisors!

I shouldn't say the plans are silent. Actually both plans say the contribution to that plan will be reduced. Very helpful.

I think I agree with you that 415 prevails, and haven't found anything so far to controvert that opinion.

Thanks for your input!

[david rigby]

BTW,

IRC 404 does not permit a deduction to be based on a violation of 415. I think it is subsection (j) of 404

[Edited by pax on 08-24-2000 at 02:58 PM]

[Guest mo again]

pax, my concern was that the contribution might be required without being deductible. There is some language in F-3 of Notice 83-10 that suggests this might be the case, even though 83-10 is dealing with a specific issue in a specific timeframe. There are references cited in F-3, all of which are useless as far as I'm concerned.

[Lynn Campbell]

Although not technically correct: if a client mistakenly puts the contribution into the wrong plan, what about moving it into the right one? Having a 20% pension plan creates problems, maybe amend it to 10% for the future?

[Guest JAREL]

I'm not sure that I agree with everything suggested above. I believe the Employer is obligated to contribute to the MP plan (unless the terms of the plan clearly indicate otherwise), thus causing the 415 limits to be violated. Then, however, the provisions of Section 1.415-6(B)(6) may be applied to remove the excess from the PS plan. If your plan language supports this (or at least is not contrary), you will avoid funding deficiencies, etc.

[Guest mo again]

With my plan (and maybe most money purchase plans), the required contribution is described in terms of being subject to the limitation on annual additions. I think that is what we are hanging our hats on. If you find something definitive, I'd sure like to know about it!

[Guest Donkey Kong]

Mo again,

I believe you should not wear hats in the office. It is unprofessional.

[Guest mo again]

It is also unprofessional to flash one's Old Spice personal hygiene products around the office but I haven't noticed it stopping anyone!

[Guest Donkey Kong]

That's slanderous! Do you know a good lawyer?

[pjkoehler]

mo again, the starting point of your analysis should be Code Section 412(a), which says that it applies only to certain types of qualified plans. Compliance with Code Section 415 is a basic qualification requirement of Code Section 401(a). Code Section 415(a)(1). Accordingly, the money purchase pension plan in question must maintain its qualified status for Code Section 412 to be an issue.

The regs require a qualified pension plan to provide "systematically for the payment of definitely determinable benefits. . . . The determination of the amount of retirement benefits and the contributions to provide such benefits are not dependent upon profits." Treas. Reg. Sec. 1.401-1(a)(4)(B)(1)(i). Making the employer's required contribution to the money purchase plan dependent on the employer's funding of the profit sharing plan under Code Section 404(a), almost certainly violates this basic qualification requirement. For the employer to advance fund the profit sharing plan and allow the money purchase plan contribution (the one that is required to be "definitely determinable") to fluctuate clearly deviates from the terms of the plan, which constitutes another basis for disqualification. Treas. Reg. Sec. 1.401-1(a)(3)(iii).

Assuming the plan is intended to be a qualified, the money purchase pension plan's normal cost (in terms of the charges to the funding standard account) is equal to the 20% formula contribution (presumably, less forfeitures), subject to the 415 limitations, because a qualified plan must impose these restrictions in determining the required employer contribution. The failure to make this contribution results in an accumulated funding deficiency. If the employer establishes a practice of allowing its money purchase plan contribution to fluctuate to accommodate its desired level of profit sharing contribution, the plan is almost certainly going to be retroactively disqualified for the reasons mentioned above. In that case, don't worry about Code Section 412, it doesn't apply to nonqualified plans.

A qualified profit sharing plan is not subject to the "definitely determinable benefit" rule. So, the only way to fund a combination 20% money purchase plan/profit sharing so as to maximize the employer's deductible contribution, is to first make the required money purchase plan contribution (i.e. satisfy that plans minimum funding requirement), before determining the amount that may be contributed to the profit sharing plan, within the annual deduction limit.[Edited by PJK on 09-05-2000 at 01:30 PM]

[Richard Anderson]

The document we use has a paragraph after the contribution formula that states:

"Notwithstanding the foregoing, the Employer's contribution for any plan year shall not exceed the maximum amount allowable as a deduction to the employer under the provisions of Code Section 404."

Therefore, if it is not deductible it can not be contributed to the plan.

Are you sure that your document does not have similar language?

[Guest mo again]

Thanks, Richard. I don't see any language like that, at least in the money purchase document, which is where it would need to be. And something tells me that PJK wouldn't like it any better.

In any event, since Phil's posting, I did find out one more piece of useful information. The money purchase plan was actually a new plan, and at the time the overfunding in the profit sharing plan occurred, the money purchase plan didn't exist even conceptually. The drafter of the money purchase plan was not aware that the profit sharing plan had been funded at all. So it wasn't deliberate on the plan sponsor's part, nor is there any past or future pattern of abuse. We would not expect the situation to come up again with respect to this sponsor. The only item on the table is the status of the contribution for this one year.

One thing I think we DON'T have a basis for saying is that the amounts were accidentally contributed to the wrong plan, since there was only one plan at that point.