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PLHart

Mistaken contribution

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Attorney X had a one-participant profit sharing plan at Fidelity for his one person law firm until he established a partnership with attorney Z on Jan 1 2018.  The merged company adopted the plan (as successor employer) of the attorney Z (who is our client) as he already had a cross-tested 401k with a number of employees (all of whom were employed by new partnership).

Anyway, attorney X , unaware as to how all this worked, made a $15,000 contribution in May of 2019 to his OLD plan, despite the fact that he had no income from his prior sole proprietorship in 2018 or 2019.  A contribution for the new partnership for 2018 is still being determined.  Attorney X wants to fix his mistake before rolling over old plan assets to new plan - but I'm not sure what kind of mistake or error this should be classified as in order to determine the proper correction method.  Any help greatly appreciated???

Thanks

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This is a tough one, I think, because at least in the IRS' view it was not a "mistake of fact" contribution, but I would research that and hope to find out that I am wrong.  It's not tax-deductible, but I think the IRS is pretty firm that the exception permitting a return of nondeductible contributions applies only if the IRS actually disallows the deduction, but I am a bit rusty on that issue and I would research it as well.  Also, I would take a deep dive into the latest EPCRS rev. proc. and see if there is a possibility of relief there, either SCP or VCP.

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Could it be as simple as - if he had no comp, his 415 limit was zero - and as a 415 problem, it needs to be corrected....presumably by removing it from the plan.

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MoJo, I thought about 415 too, but isn't a 415 excess required to go into a suspense account to be used to offset future contributions?      

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I would do mistake of fact.

The mistaken fact was that there was compensation.

It's a one participant plan for X, and it seems as there will be no more contributions to it.  No one else to reallocate it to.

Send it back; he'll have to redo his taxes.

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I suppose it depends on the type of contribution it is classified as.  As a pass-through entity, with "deferrals" being "electable" prior to the end of the year (which, of course he did - if this is the path to be taken), then refunding it would be the correction.  If it is employer contributions, it's a forfeiture....  What's the history as to the nature of contributions made previously?

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I tend to favor the 'Mistake of Fact' solution since the plan is terminating, although I'm not certain this technically qualifies as such and the custodian (Fidelity) is being a stickler on this.   Although it was certainly a mistake made by a confused individual who didn't understand how these things work...

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Employer contributions in excess of 415 must be put in suspense, but if any remain on plan termination I thought those could actually be returned to the employer. I thought salary deferrals in excess of 415 get refunded regardless.

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Wouldn't a 415 surplus held in suspense and then returned to employer on plan termination be subject to the 50% reversion excise tax?

  

 

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I admit this is a problem that deserves a painless solution, and you should be looking for a correct patch to move forward, or at least the one that is the "closest" to being a correct path.  I'm not sure that mistake of fact is that path.  What if this plan was merged into the partnership plan and the 415 surplus is applied to employer contributions under that plan?  Maybe the partnership can treat that $15,000 as an indirect capital contribution by X to the partnership and, if so, eventually get it back tax-free? 

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You'd still have at least one year's worth of the 10% excise tax on non-deductible contributions to the X plan.

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36 minutes ago, jpod said:

You'd still have at least one year's worth of the 10% excise tax on non-deductible contributions to the X plan.

Not if it's a mistake of fact.

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7 minutes ago, BG5150 said:

Not if it's a mistake of fact.

Understood.

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How about if you merge the old plan into the new plan and then use the old plan's suspense account to fund the new plan's contribution?  If it's the same plan year/fiscal year, shouldn't that preserve the deductibility?

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