Deduction limit

[Guest BAR]

Can an employer contribution more than the 404 deduction limit to a plan, recognizing that they can only take a deduction up to 15% of comp? If yes, what issues need to be considered?

[david rigby]

To the best of my knowledge, there is no "maximum contribution", only a maximum deduction. However, there is an excise tax on actual contributions greater than what can be deducted. IRC section 4972.

[wmyer]

Generally, you'd have to fill out form 5330 to pay the 10% excise tax. Not only that, but you'd have to reduce the contribution next year by the excess amount. In the past it didn't seem to make any sense to overcontribute deliberately, but if you've done it accidentally, then the excise tax is one remedy. Of course next year the 404(a) limit increases to 25%.

[Guest dubya]

Does anyone have any comments on the following related situation:

I thought I recalled hearing that in some instances, over contribution penalties may be avoided depending on whether the contribution was receivable or not.

So, if company A, which is always right around a 15% contribution for its PS Plan, actually puts in and allocates a 17% PS contribution for 2001 (all/most of it is deposited in 2002), can the employer claim this contribution in 2002 and avoid the 10% tax? The Company is not expected to be anywhere near the 25% limit in 2002.

Thanks for your help.

[stephen]

I believe once the contribution has been allocated it's too late to claim it's a contribution for the following year and unless the document allows you to reduce the contribution by the excess amount you are stuck with the penalty.

If the contribution has not been allocated or if the document allows you to reduce the contribution amount the contribution can be allocated and deducted in the year it was contributed.

[Guest dubya]

Thanks for the reply Stephen. I looked in a 1999 version of the ERISA Outline Book (Sal Tripodi's book) and in Section 7 (page 7.206 to be exact), he seems pretty clear that, given the scenario I described, that not only can you avoid the 10% tax by taking part of the deduction in the year in which it was deposited, but that the amount allocated for the prior year does not have to be the same as the deduction taken for that year.

So, if the employer wants to allocate a $100,000 PS contribution for the 2001 Plan year, but discovers early in 2002 that only $70,000 is deductible for 2001, the employer can make the $100,000 deposit in 2002, count $70,000 as a 2001 contribution, apply the remaining $30,000 towards the 2002 contribution, and still have the $100,000 allocated in 2001. All of this assumes that the deposit was made in 2002, before the 2001 tax return filing deadline for the company.

At least thats how I read it. Since this is the answer I was looking for, I hope I am not guilty of reading something thats really not there. However, it did seem pretty clear in the book.

[Tom Poje]

that is the way I have read it as well, so I don't think you are reading anything into it. you just have to remember in 2002 you are deducting that contribution...e.g. you cant make a 25% contribution in 2002 cuz you already used some of it up.

All this hinges on the fact that normally you would deduct the amount the same year you deposit it. however, a special rule says you can deduct it in the year it applies to. so used to deducting it for that reason, usually one doesn't consider deducting it in the year made.