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Employer over-deposited PS to holding account--now what


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In 2020, ER deposited $100,000 to a holding account in the plan (I know!).

Maxing out the owner and giving 5% to the EEs results in a $70,000 allocation for 2020 and passing of tests.

Does he have to allocate the remainder to the participants?  Or can he take back the funds as a Mistake of Fact?

QKA, QPA, CPC, ERPA

Two wrongs don't make a right, but three rights make a left.

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Mistake of fact is usually a minor typographical or arithmetic error. If they meant to put in $10,000 and but typed an extra zero by accident, that would be one thing. But I would have a hard time believing they didn't notice $90,000 missing for over 8 months!

Check the plan document. I bet it says that the contributions will be allocated to participants.

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Here is a question, if they only took deduction for 70k and pay excise tax on 30k, would the 30k be applicable for 2021? Given the allocation above, 70k is not the 25% deduction limit i.e. there was more room for deductions.

I am not sure I agree with my own statement though.

Any thoughts?

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3 hours ago, Jakyasar said:

Here is a question, if they only took deduction for 70k and pay excise tax on 30k, would the 30k be applicable for 2021? Given the allocation above, 70k is not the 25% deduction limit i.e. there was more room for deductions.

I am not sure I agree with my own statement though.

Any thoughts?

I am doing this from memory of the deduction/excise tax rules but as a general rule failing to take a deduction you could is NOT the same thing as something is not deductible. 

As such before I would go down this route someone would have to give me a clear cite that not taking a deduction and paying the excise tax allows you to time the allocation like this.  

 

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14 minutes ago, ESOP Guy said:

I am doing this from memory of the deduction/excise tax rules but as a general rule failing to take a deduction you could is NOT the same thing as something is not deductible. 

As such before I would go down this route someone would have to give me a clear cite that not taking a deduction and paying the excise tax allows you to time the allocation like this.  

 

There is none.

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3 hours ago, Jakyasar said:

Here is a question, if they only took deduction for 70k and pay excise tax on 30k, would the 30k be applicable for 2021? Given the allocation above, 70k is not the 25% deduction limit i.e. there was more room for deductions.

I am not sure I agree with my own statement though.

Any thoughts?

I agree with the other commenters that there is no way this is ok. The excise tax under IRC 4972 is on non-deductible contributions, defined as contributions made in excess of the limit under IRC 404. Choosing not to take a deduction for a contribution does not make it a nondeductible contribution, if it does not exceed the 404 limit.

Furthermore, even if you did actually make a nondeductible contribution, you still have to allocate it to the extent possible. You could carry forward an allocation if, for example, all participants were at their 415 limits.

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Thank you and this is why I said I do not agree with my own statement. I was just curious if I missed something.

100% in agreement with CB and others. 30k extra for all rank&file, sure will be one pissed of plan sponsor.

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