Late matching contributions

We have a client with 401(k) plan that provides for matching contributions. Under the terms of the plan, the matching contributions should be made by the time for filing of the employer's tax returns, including extensions.  And of course, under Code section 404(a)(6), they have to be made by then in order to be deductible on the prior year's tax return.

In this case, the calculation of the matching contributions for 2016 got bogged down, and still hasn't happened.  But over in finance, they got very efficient and actually filed the corporate return on March 15, without ever requesting an extension.

So, it would appear we may have two problems:

• The company may have to give people earnings on the late contributions.
• The company may not be able to take a tax deduction for 2016 for the contributions.

Obviously, both of these problems could have been averted by requesting an extension (which would have been automatic).  But is there anything we can do after the fact?  It just seems silly that the company will be out a lot of money due to late contributions, when those contributions wouldn't even have been considered late had the company just requested the automatic extension on its tax return.

I can see an argument that there are no 'late contributions' that would warrant missed earnings. The notion of 'late deposits of withheld payroll amounts' is driven by prohibited transaction rules (since the DOL considers the withheld amounts to be plan assets at the time they are withheld). This is an important distinction, since matching contributions (typically) do not become plan assets until actually made. Merely filing a return does not preclude the discretion to not make the match (just amend the return).

As far as making the match deductible for 2016; I couldn't begin to imagine an approach consistent with the rules. 

Good Luck! 

I know we don't have to worry about the prohibited transaction rules when we're talking about the match rather than the deferrals.  But my concern about the late contributions relates to the issue of not operating the plan in accordance with its terms.  I'd like to say that the participants can have no legitimate expectation of having the match made by March 15, given that the employer could have gotten an automatic extension and that the plan would then have been able to make the contributions as late as the extended date.  But if the plan itself says the match is to be made by the date of filing, including extensions, do you see a way we can avoid the argument that the plan was not operated in accordance with its terms?

Not making the match is not an option, since this is a mandatory rather than discretionary match.

If you actually have language that goes beyond how the match is calculated  to prescribe when it must be deposited, then you would have a failure to operate the plan according to its written terms.  I know this deposit deadline is written by statute (and generally reflects a standard that you must make it by then in order to deduct it or in order to have it considered as an annual addition).  I haven't seen a plan's actual language go as far as dictating a deposit deadline.  But, if it did, then you have a failure to follow the terms of the plan.

Now, if the plan states "In order to receive a deduction, then....."; that's not necessarily an operational provision.  But, if the plan (like you stated) says that the matching contribution must be deposited by a certain date (period), then you would have a failure to operate the plan pursuant to its terms by not making the deposit by that date.  The documents I use don't seem to go that far in making the deposit timing an operational requirement.

Good Luck!

Well, that was the conclusion I was coming to, although it's not the one I wanted to hear.

I think we may be able to get around the annual additions problem due to Treas. Reg. § 1.415(c)-1(b)(6)(i)(A), which states:

Quote

For purposes of this section, if, in a particular limitation year, an employer allocates an amount to a participant's account because of an erroneous forfeiture in a prior limitation year, or because of an erroneous failure to allocate amounts in a prior limitation year, the corrective allocation will not be considered an annual addition with respect to the participant for that particular limitation year, but will be considered an annual addition for the prior limitation year to which it relates.

If the contributions had been made in the prior year, they would have been allocated to that year, so I would take the position that it was an erroneous failure to allocate amounts in a prior limitation year.  But I'm not seeing a way around either the earnings or deductions issue.

I'd look closely at the language regarding the due date.  Can it be interpreted that the due date is the filing deadline plus extensions regardless of whether or not the plan actually goes on extension?  Or is it explicit that it must be deposited prior to the actual filing.  If so, that's bad language.

With regard to the deduction, I would infer that the client doesn't care about the deduction since they already filed.  The amount contributed is deductible on the 2017 return.  If I recall correctly, amounts contributed for a prior year (in this case I'm talking about the 2017 deductible limit) that were not previously deducted are added to the deductible limit if the only reason that they weren't previously deducted is that they were contributed after the filing.