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Return of non-deductible contributions


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Sec. 403(c)(2)(C) of ERISA permits the return of a contribution made by an employer if the contribution was made on the condition that it was deductible.

If a business owner makes a contribution in 2016 based on what he thought his income would be and then the income is less making the contribution non-deductible, can the contribution be returned without any reversion tax?

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There was a BenefitsLink conversation in 2002.

Working from the six authorities cited there, one might use legal-research tools and methods to find what's been published over the past 15 years.

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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The document, if a pre-approved format, should have language for this - similar to the text below:

(b)   Mistake of fact. In the event the Employer shall make an excessive contribution under a mistake of fact pursuant to Act Section 403(c)(2)(A), the Employer may demand repayment of such excessive contribution at any time within one (1) year following the time of payment and the Trustees shall return such amount to the Employer within the one (1) year period. Earnings of the Plan attributable to the contributions may not be returned to the Employer but any losses attributable thereto must reduce the amount so returned.

 

(c)   Except as specifically stated in the Plan, any contribution made by the Employer to the Plan (if the Employer is not tax‑exempt) is conditioned upon the deductibility of the contribution by the Employer under the Code and, to the extent any such deduction is disallowed, the Employer may, within one (1) year following the final determination of the disallowance, whether by agreement with the Internal Revenue Service or by final decision of a competent jurisdiction, demand repayment of such disallowed contribution and such contribution shall be returned to the Employer within one (1) year following the disallowance. Earnings of the Plan attributable to the contribution may not be returned to the Employer, but any losses attributable thereto must reduce the amount so returned.

i believe the miscalculation of compensation is included under the mistake of fact. On the tax deductibility condition, the language appears to require disallowance by the IRS or another jurisdiction before demanding return of the excess contribution - but i think you're safe on the mistake of fact regardless. This illustrates a good reason for business owners to wait until after year end to deposit their contributions.

Kenneth M. Prell, CEBS, ERPA

Vice President, BPAS Actuarial & Pension Services

kprell@bpas.com

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