I have a client who has a last day employment rule and insists on funding his MPP plan early in the plan year. As a result, the contributions he funded in 2001 exceeded the amount of his required contribution. Corporate tax return is on extension. Is an excise tax due as a result of the "nondeductible" contribution?If so, can the excess funds be returned to the employer prior to the due date of the corporate return to avoid the excise tax? Is the excess reportable on Schedule R?

Is it truly nondeductible (exceeded IRC 404 limits) or is it above the plan's funding formula?

Jaemmons, for a money purchase plan the funding amount is the deductible amount (not considering any other plans that may factor into the deductions) (404(a)(1)(A)). For example, if the contribution formula is 10% of compensation, you cannot contribute and deduct 15% of compensation.

My understanding is that the deductible limit for a MPP is the amount needed to satisfy minimum funding. I also understand that returning the funds to the employer can only be done in very limited circumstances....just because the contribution is not deductible is not reason enough. But I continue to hear different answers on this subject. Does anyone know about the effect on Schedule R? If you are required to report the excess on Schedule R, isn't this an invitation for IRS to bill you for the excise tax?

Although I've never done one, my recollection is that you need to apply to the IRS for a private letter ruling disallowing the deduction so that you can get a refund. Absent the disallowance, there can be no reversion.

Thanks Kirk. Any input regarding Schedule R?