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Excess Contribution


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5 replies to this topic

#1 Orlando4k

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Posted 11 May 2011 - 10:56 AM

For 2010 plan year employer prefunded $100,000 to their defined benefit plan. Due to several factors the minimum and maximum contribution is zero. The employer also has a 401(k) plan with a profit sharing feature. The employer has made no profit sharing contribution for 2010, but based on 25% of compensation could contribute $60,000. In reading the instructions for the form 5330 it says that the 10% excise tax is based on the the excess contribution less the amount allowable as a deduction under section 404 for that year. If the employer does not contribute $60,000 to their profit sharing plan would this reduce the amount of excess contribution subject to the excise tax to $40,000?

#2 Gary

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Posted 12 May 2011 - 05:12 PM

If the maximum deduction to DB plan is zero then I don't believe any contribution to DB plan would be deductible.

With that said, I thought somewhere either in 404 or 4972 excise tax rules that excess contributions to single employer DB plans were not considered non deductible contributions and thus not subject to 10% excise tax. That's one interpretation, though not sure if it has been understood that way indusdtry wide.

#3 AndyH

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Posted 13 May 2011 - 11:47 AM

Agree.

It may be that no excise penalty applies as a result of PPA changes to the excise tax rules. I am not fluent in the exceptions off the top of my head but I know they exist and would thoroughly research this issue before concluding that a penalty applies.

And if the max DB deduction is really zero, the max deduction is really zero, not 25% of pay, I would agree.

Edited by AndyH, 13 May 2011 - 11:49 AM.


#4 Orlando4k

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Posted 13 May 2011 - 03:11 PM

Agree.

It may be that no excise penalty applies as a result of PPA changes to the excise tax rules. I am not fluent in the exceptions off the top of my head but I know they exist and would thoroughly research this issue before concluding that a penalty applies.

And if the max DB deduction is really zero, the max deduction is really zero, not 25% of pay, I would agree.

I may have been reaching. I wasn't looking so much at the deductability of the DB contribution as I was looking at the 5330 to determine how much of the excess contribution, if any would be subject to an excise tax. The form 5330 doesn't seem to address the 404 limit amount used to offset the amount subject to the excise tax when there is both a DB and DC plan. Since the employer has a profit sharing plan their 404 limit becomes 25% of compensation when the DB contribution is zero.

#5 david rigby

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Posted 13 May 2011 - 04:40 PM

... maximum contribution is zero.

Are ya sure?
I'm a retirement actuary. Nothing about my comments or advice is intended or should be construed as investment, tax, legal or accounting advice. Occasionally, certainly not all the time, it might be reasonable to interpret my comments as actuarial advice.

#6 AndyH

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Posted 13 May 2011 - 04:55 PM

..and if so

Look at IRC 4972©(7) before you complete the 5330.