not for profit funding match for 2023 in 2025

[Tom]

We have a not-for profit client who did not direct that a match be calculated and funded for 2023 due to key personnel changes.  Now they realize this and they want to fund a 2023 match. The match is fully discretionary.

We are advising against this since it will go to some former employees who left in 2024.  If they insist, we can calculate on 2023 census and file an amendment 5500 for 2023.  WE are instead encouraging them to fund a more generous match for 2024. 

I guess my questions is - how far in the future can you fund a prior year when you aren't concerned about the tax deduction deadline?

Thank you,

Tom

[Peter Gulia]

For some charities, long delays—years—between the work and the employer’s payment to the plan of a nonelective or matching contribution happen (sometimes, because of delays in government payments).

Consider carefully which limitation year a particular annual addition is counted in. 26 C.F.R. § 1.415(c)-1(b)(6)(i)(B) https://www.ecfr.gov/current/title-26/part-1/section-1.415(c)-1#p-1.415(c)-1(b)(6)(i)(B)

If the charity gets government support or other grants measured even in part based on a measure of cost accounting, consider how the retirement plan allocations affect the cost accounting.

[Bri]

Won't the annual additions deadline still matter?

[Tom]

Bri yes I would think so.  They are nowhere near 415 limits for anyone - deferral and small match plan only.  

 

[Peter Gulia]

If, for example, the plan sponsor Tom describes declares a nonelective or matching contribution based on 2023 compensation but doesn’t pay that contribution into the plan’s trust until February 2025, the contribution counts against the annual-additions limit for whichever limitation year includes February 2025.

If that limitation year has also other annual additions—for example, for a nonelective or matching contribution paid or accrued in that year and counted in that year, there could be a bunching effect.

[ESOP Guy]

7 hours ago, Peter Gulia said:

 

If that limitation year has also other annual additions—for example, for a nonelective or matching contribution paid or accrued in that year and counted in that year, there could be a bunching effect.

Or worse if as the original post noted some have terminated their 415 limit is $0 there is an allocation for them.   I have had to have this conversation with a client before.  

 

It is most likely a bad idea to fund such an old allocation years later.   

[Peter Gulia]

While it might be no help now for Tom’s client described above, a charity facing challenges in promptly declaring, determining, and paying contributions might consider, instead of a § 401(k) plan, a § 403(b) plan.

Under § 403(b), even a former employee has, for up to about five years after severance, some includible compensation on which a § 415(c) annual-additions limit is measured.

Statute:

“For purposes of this subsection [I.R.C. § 403(b)], the term ‘includible compensation’ means, in the case of any employee, the amount of compensation which is received from the employer described in paragraph (1)(A), and which is includible in gross income (computed without regard to section 911) for the most recent period (ending not later than the close of the taxable year) which under paragraph (4) may be counted as one year of service, and which precedes the taxable year by no more than five years.  . . . .” I.R.C. § 403(b)(3) http://uscode.house.gov/view.xhtml?req=(title:26 section:403 edition:prelim) OR (granuleid:USC-prelim-title26-section403)&f=treesort&edition=prelim&num=0&jumpTo=true

“In the case of an annuity contract described in section 403(b), the term ‘participant’s compensation’ means the participant’s includible compensation determined under section 403(b)(3).” I.R.C. § 415(c)(3)(E) http://uscode.house.gov/view.xhtml?req=(title:26 section:415 edition:prelim) OR (granuleid:USC-prelim-title26-section415)&f=treesort&edition=prelim&num=0&jumpTo=true

Regulations:

“For purposes of applying paragraph (b) of this section [applying I.R.C. § 415 limits to a § 403(b) participant], a former employee is deemed to have monthly includible compensation for the period through the end of the taxable year of the employee in which he or she [the former employee] ceases to be an employee and through the end of each of the next five taxable years. The amount of the monthly includible compensation is equal to one twelfth of the former employee’s includible compensation during the former employee’s most recent year of service. Accordingly, nonelective employer contributions for a former employee must not exceed the limitation of section 415(c)(1) up to the lesser of the dollar amount in section 415(c)(1)(A) or the former employee’s annual includible compensation based on the former employee’s average monthly compensation during his or her most recent year of service.” 26 C.F.R. § 1.403(b)-4(d)(1) https://www.ecfr.gov/current/title-26/part-1/section-1.403(b)-4#p-1.403(b)-4(d)(1)

“In the case of an annuity contract described in section 403(b), the term participant’s compensation means the participant’s includible compensation determined under section 403(b)(3). Accordingly, the rules for determining a participant’s compensation pursuant to section 415(c)(3) (other than section 415(c)(3)(E)) and this section do not apply to a section 403(b) annuity contract.” 26 C.F.R. § 1.415(c)-2(g)(1) https://www.ecfr.gov/current/title-26/part-1/section-1.415(c)-2#p-1.415(c)-2(g)(1)

Further, § 403(b) has its provision for counting service:

“In determining the number of years of service for purposes of this subsection, there shall be included—
(A) one year for each full year during which the individual was a full-time employee of the organization purchasing the annuity for him, and
(B) a fraction of a year (determined in accordance with regulations prescribed by the Secretary) for each full year during which such individual was a part-time employee of such organization and for each part of a year during which such individual was a full-time or part-time employee of such organization.
In no case shall the number of years of service be less than one.” I.R.C. § 403(b)(4) http://uscode.house.gov/view.xhtml?req=(title:26 section:403 edition:prelim) OR (granuleid:USC-prelim-title26-section403)&f=treesort&edition=prelim&num=0&jumpTo=true

The implementing regulations state many paragraphs of detailed rules for counting service. 26 C.F.R. § 1.403(b)-4(e) https://www.ecfr.gov/current/title-26/part-1/section-1.403(b)-4#p-1.403(b)-4(e)

Example: A charity’s full-time employees work eight hours a weekday. Some part-time employees work two hours a weekday. For them, compensation in the four years before severance counts to form a year’s-worth of compensation that determines a § 415(c) limit on annual additions in limitation years after severance.