Client doesn't want to make contribution to profit sharing plan.

[Guest Jae]

Client declared a profit sharing contribution in December of 1999 for the 1999 plan year. It is now time to make that contribution and they don't have the money. What are their options? It looks to me like if they don't fund, they lose the deduction and are subject to the excise tax. Am I missing anything? Is there anything they can do to put off the contribution?

Thanks,

Jeff

[pjkoehler]

What are the terms of the plan that lead you to believe that the employer is obligated to contribute to the plan based on its favorable earnings report? Ordinarily, profit sharing plans leave the amount of the employer contribution, if any, to the discretion of the board of directors. If the board previously adopted a resolution approving a specified employer contribution to support a corporate tax deduction under Code Sec. 162, but now finds that it cannot make that contribution by the tax filing deadline, it should revoke its prior resolution and adopt a substitute resolution declaring a zero employer contribution for the year. This means, of course, that the employer's deduction is not allowable.

On the other hand, although rare, the plan could be drafted to provide an employer contribution formula that is based on a specified percentage of reported earnings and which requires the employer to deposit the contribution with the trustee no later than a date certain. Is that the case here? If so, the employer's failure to make the necessary contribution by the required date could jeopardize the qualified status on the grounds that the plan is not being operated in accordance with its terms. Treas. Reg. Sec. 1.401-1(a)(3)(iii). Of course, if the employer wants the discretion to make or not to make a contribution each year, it should consider amending the plan going forward to eliminate the contribution formula. However, the employer should bear in mind that it may not determine the amount or the time of discretionary contributions in a manner that discriminates in favor of HCEs. Treas. Reg. Sec. 1.401-1(B)(1)(ii). Furthermore, while an employer maintaining a discretionary profit sharing plan is not required to make a contribution every year, there must be "recurring and substantial contributions out of profits for the employees" as indicia that the plan was intended to satisfy the permanency requirement under Treas. Reg. Sec. 1.401-1(B)(2). This essentially means that a plan to which the employer makes merely occassional contributions without regard to the pattern of its net earnings, will probably fail this basic qualification requirement.

[Guest Jae]

Thanks Phil, I was not aware that they could make a substitute declaration. I thought that once they had declared an amount they were married to that amount and it couldn't be changed. I could not find any cite for that proposition, that was just my gut reaction.

Can you point me to any guidance for the proposition that they can change their declaration?

Thanks again.