One man profit sharing plan that exceeded 415

[Guest THess]

I have a one man straight profit sharing plan. (The employer is an S-Corp.) The employer contributed $46,200 to the profit sharing plan. The contribution was put in before the end of the plan year. What options are available to him to correct this? Also, where would this be shown on form 5330, if excise tax is applicable? (Also, someone had told me that the deductibility limit for a one man plan is the lesser of 25% of pay or $40,000...is this true?)

Thank you for all your help!

[kmciver]

There are two limits you need to think about:

1. The individual limit (415..) of 100% or 40,000. and

2. The "corporate" limit (404c) of 25%, as long as EGTRRA has been adopted.

Since a one man plan falls under both categories, the max deduction for this person is 25% or 40,000 whichever is less.

[Guest THess]

Thanks for your quick reply. So is the excise tax on the deductibility limit only? And also, can the money stay in the plan and be used to reduce this year's 415 limit?

[kmciver]

Sorry, I'm not sure what the answers are. K

[Mike Preston]

Yes, the excise tax is levied only on amounts contributed in excess of the amounts that are deductible. The amounts must stay in the plan unless they were brought about by very limited circumstances. To the extent they remain in the plan they are part of a suspense account. The suspense account is used to fund subsequent year contributions. As to where it is reported on the 5330, have you looked at the form? It is very hard to miss.

[Guest THess]

Thanks Mike! Yes, I have looked at the 5330 form and know where to report excise tax on deductibility limit being exceeded...just wasn't sure if there was something else to report also.

I am aware of the limited circumstances too, as far as taking money out of the plan....but being a one man plan, what would be the purpose of a suspense account since the money will be allocated to himself this year? Is a suspense account necessary in this situation?

Thanks!

[Mike Preston]

I guess the term suspense account isn't very accurate in this case, is it? Nonetheless, that is what it is called. On the last day of the prior year the money has to be somewhere. You can't give it to the owner, so it has to be in a .....yes....suspense account.

That account is used to fund the next year's allocation, just like a contribution made on the first day of the year would be used to fund the next year's allocation.

The interesting part of all of this is what you do with the earnings on the suspense account. Are they turned into annual additions? Or are they regular earnings that will naturally flow to the owner? What if they are negative?

I think the answers to all of these questions can be found by looking at the language of the plan. What does it say?

[mbozek]

two Questions :

1. When did the employer's tax year end? Employer contributions are deductible in the tax year for which they are contributed (not plan year) but they can be deducted for the prior tax year if made before the date for filing the ers tax return with extensions. Rev Rul. 76-28. If the tax year and plan year are different then the er may be able to claim the excess as a deduction for a subsequent tax year. E.g. , if er made contribution in FEb 03 for plan year ending Feb 28 but er tax year ends in Dec 02 employer can deduct up to 40k for 02 tax year and remainder can be deducted in 03 tax year.

2. ERISA permits the withdrawal of a contribution conditioned upon a deduction to the extent the deduction is disallowed within one year of the disallowance. Why not submit a deduction for $46,000 to the IRS and wait for the IRS to disallow the deduction. Or withdraw the excess before filing on the grounds that it would be disallowed since it exceeds the 415 limits.

[Mike Preston]

1.It is an S-corp. Therefore the FYE is 12/31, right?

2. In order to have a deduction disallowed the IRS has to disallow it. Nobody else can. See 90-49, which I think has something on this issue, even though it is geared towards DB plans. Also, in order to have a contribution contingent on deductibility,the plan must so state. In fact, the IRS, around 1990 or so when 90-49 came out, made it clear that even if the document said the Plan Administrator "MAY" withdraw a contribution that was disabllowed, that the language wasn't good enough. It had to say "SHALL" withdraw.