Crediting of Employer Contributions

It is a well-known rule that employer contributions must be deposited by the date the company tax return is due in order for the employer contributions to be deductible on that return.  If an employer contribution is deposited after the company tax return is due, the employer may deduct the contribution on the following year’s company tax return 

The rules regarding when contributions are credited and counted as annual additions are similar.   (See below for the definition of an annual addition.)  In order for employer contributions to be credited for a plan year, the contributions must be deposited by the due date of the company tax return plus a 30-day grace period. 

For example, consider a company that has the retirement plan year and company fiscal year both end on December 31, 2007 and the company tax return is not extended.  The company tax return is due March 17, 2008 (March 15th is a weekend, so the due date is the following business day).  The employer contributions must be deposited by April 16, 2008, 30 days later, in order for the employer contributions to count as annual additions for the 2007 plan year.

If in the above example, the employer tax return was extended, it would be due September 15, 2008.  The employer contributions to the retirement plan, therefore, must be deposited by October 15, 2008 in order for the employer contributions to count as annual additions for the 2007 plan year.  If employer contributions are deposited timely in order for them to be deductible on the current year’s company tax return, the crediting rules will never come into question. 

The crediting rules may arise with the depositing of Qualified Non-Elective Contributions (QNECs).  QNECs are employer contributions that may be made in order to correct a test failure.  QNECs must be deposited within the 12 months following the year of the failure.  For example, if a plan fails the 401(k) nondiscrimination test in a plan year ending December 31, 2007, QNECs must be deposited by December 31, 2008 in order for them to correct the 2007 test failure.

If the QNECs are deposited by the due date of the employer’s tax return plus a 30-day grace period, they will be credited as annual additions for the 2007 plan year.  However, if the QNECs are deposited after the due date of the employer’s tax return plus a 30-day grace period, they will NOT count as annual additions for the 2007 plan year.  They will instead count as annual additions for the 2008 plan year.

In order for an employee to receive an annual addition for the 2008 plan year, he must have received compensation in 2008 that was at least as great as the annual addition.  Therefore, if the QNECs were not deposited by the due date of the employer’s tax return plus a 30-day grace period, QNECs could not be given to any employee who terminated employment in 2007 as that employee would not have compensation in 2008.  This could greatly increase the QNEC needed to correct the 2007 401(k) nondiscrimination test.

If an employer ever intends to make an employer contribution and questions whether the contribution will be deposited by the due date of the company tax return, it is a good idea to extend the company tax return in order to extend the deadline for the crediting of the contributions as annual additions.

Definition of Annual Addition:

Contributions to a participant, including 401(k) contributions, all employer contributions, and forfeitures allocated to a participant.  For example, Susie Queue had 401(k) contributions in 2007 of $1,500 and she received employer matching contributions of $375.  Susie’s annual additions for 2007 were $1,875.  

If you have questions regarding annual additions or the deductibility of employer contributions contact Administrative Retirement Services, Inc.

back