benconsulting

I am working with Bob (soCalActuary) on this and can explain a little more. This was an LLC that had both DB and 401k Plans. The sole owner was paid on a W2, which is what probably triggered the audit at business level. IRS denied the W2 compensation and therefore also denied the deduction for the 401k deferral and DB contribution for years 1 and 2. As to what happens to contributions made, no guidance was provided. Just a simple denial of deduction. By year 3 and 4, LLC had elected to be taxed as S corp and things were fine. We will be amending year 1 and 2 Form 5500 for each plan. No contributions made in year 5. The client wishes to terminate both plans in year 6. The question is what happens to the earnings on contributions from year 1 and 2 and brought forward to the time of termination. The denied deduction amount may be refunded as a mistake in fact but what about the earnings on the refunded amount? Are the earnings also to be refunded, are eligible for rollover or what else can be done.

We recently had a different experience. A pension plan was being audited for 2015 plan year. As part of the document request, the auditor noted that IRS had no record of 2008 filing. This was the last year of paper filing form 5500. We provided a copy and all was well. However, this was noted on the closing letter. So, YMMV.

That is what IRS Notice 2000-3, Q-2, mentioned above discusses.

Because these contribution are not and will never be classified as "participant contributions", which is what line 4a is all about.

We recently had exactly the same situation with an auditor, who even called DOL, staff accountant for an answer and was given wrong information(surprise!) on this. The simplest proof is on page 38 of 2015 Form 5500 instructions for line 4a. It only talks about Employee or Participant contributions, not about employer contributions. A look at IRS Notice 2000-3 (Q-2) may also be helpful. This also explains about true up issues of employer contributions timings. We stuck to our position and they eventually came around.