Let's suppose you have calendar year 2001 DB plan, and employer also has a 401(k). 401(k) is deferral only. Employer contributes the required amount to the DB, which is more than 25% of compensation. In addition, the employees all defer under the 401(k) plan - no one exceeds 415, a plan limit, or 402(g).
So, the employer has a nondeductible contribution to the 401(k)for 2001. Pays the excise tax. What happens in 2002? How do they go about deducting this, since the DB cost will exceed 25% of comp every year for the forseeable future. Are they stuck paying the 10% tax for every year that it remains nondeductible, or is there another way out? (I'm thinking they are stuck, but I'm hoping one of you clever people can explain otherwise) Thanks.
The document does provide for the return of contributions made under a mistake of fact. Problem is, this situation doesn't qualify as a mistake of fact, at least not according to the little guidance that I've ever seen. Certainly one could attempt to make this argument, but if unsuccessful, the consequences are worse than paying the nondeductible contribution tax. So I'm back to my original question - is there any way out of continuing to pay the tax each year it remains nondeductible? Any suggestions?
I agree with you about the mistake of fact issue, but I would not pay the excise tax for 2002. Absent guidance to the contrary, I'd deduct it in 2002. Even if it were not deductible, I can't see how the excise tax applies in 2002.
Belgarath, I don't see how you are going to get guidance on this any time soon, since it's a new EGTRRA issue. Maybe a PLR is appropriate.
Under ERISA 403(c)(2) plan can refund excess contribution within 1 year of deduction under mistake of fact rule. Plan should be amended to permit refund. All well drafted plans contain a mistake of fact clause.
mbozek - I understand that. And the plan contains such a provision. The problem is that for a DC plan, the mistake of fact is fairly limited. PLR 9144041 pretty clearly shows the thinking of he IRS. (I know it doesn't have the force of law) And Rev. Proc. 90-49, which provides for the return upon disallowance for DB plans, doesn't help at all in this situation. Are you aware of a similar Rev. Proc. or PLR which allows this for DC plans? Any cites would be very helpful. Thanks!
mbozek - thanks for the response. Now, the excess can't be deducted in the next year (2002) because the DB contribution will continue to exceed the 25% limit, so only the DB cost will be deductible. So we're left with the mistake of fact. Since this is facts and circumstances determination, as per excerpt from 91-4 below, then we are left with very little guidance, other than the PLR 9144041, and Notice 89-52. In that guidance, the client would probably be stuck, as this situation wouldn't qualify. So other than requesting a PLR (which I wish somebody would, to help clarify this issue someday!) is there any other guidance or court cases you are aware of that have ruled on this mistake of fact? If the answer is just "roll the dice, make your argument, and hope the IRS buys it" that's fine - I can accept that, and tell the client to consult legal counsel to determine if they want to risk it or not. I just want to make sure I'm not missing some guidance that addresses the issue more fully. Thanks again.
P.S. Logically, it would seem most unreasonable for the penalty to apply again in 2002 anyway, since the same 401(k) deferral only situation wouldn't cause any problem if it were done for the first time in 2002. But I'm not sure how I can get to that "safety zone" via statute or regulation.
REV-RUL, PEN-RUL ¶19,740, Rev. Rul. 91-4, 1991-1 CB 57., Reversions: Employer contributions: Good faith mistakes. , (Jan. 01, 1991)
The determination of whether a reversion due to a mistake of fact or the disallowance of a deduction with respect to a contribution that was
conditioned on its deductibility is made under circumstances specified in section 403(c)(2)(A) and (c) of ERISA, and therefore will not adversely
affect the qualification of an existing plan, will continue to be made on a case by case basis. In general, such reversions will be permissible only
if the surrounding facts and circumstances indicate that the contribution of the amount that subsequently reverts to the employer is attributable
to a good faith mistake of fact, or in the case of the disallowance of the deduction, a good faith mistake in determining the deductibility of the
Right you are! Glad you're more awake than I am. Somehow lost track of this while wrestling with the mistake of fact issue. Now, help me work through this, if you don't mind. Say the amount of the deferrals was 10% of pay. They defer 10% of pay again in 2002. What can be deducted by the employer? The whole 20%, since it wouldn't exceed any 415 limits? Muchas Gracias.