Deductability of QNC

[Guest Ella]

We are making a QNC to restore a participant who missed deferrals in prior years.

Someone has told us that such QNC contributions are not deductible. Is this correct?

If so, would that impact using company matching forfeitures to fund the QNC? The matching contibutions were deductible of course.

[Blinky the 3-eyed Fish]

QNEC contributions are deductible. Who is it that said they are not?

[wmyer]

QNEC contributions are deductible if made by the tax filing deadline and if they do not come from forfeiture. If you're using money from forfeiture to make the QNEC, or to make a matching contribution for that matter, the amount that comes from forfeiture is not deductible.

[QDROphile]

The question has terminology problems. A contribution to correct an error is not what one would call a QNEC, so discussion of deductibility of QNECs probably does not get to the issue.

A contribution to a qualified plan has to be deductible under section 162. Section 404 limits the amount of deduction for plan contributions for a year. A contribution in a year that corrects undercontribution errors in past years is probably deductible under section 162 in the year of contribution and does not count against the 404 limit applicable to the year of contribution because it is not a contribution for that plan year, it is a payment to the plan under the authority of Rev. Proc. 2001-17. It is not pursuant to plan terms (except indirectly); it is not allocated like a contribution to the plan for the current plan year. Under the principles of Rev. Proc. 2001-17, one gets the idea that the deduction may not be allowed to the extent that it would have caused the contribution for the year being corrected to exceed the 404 limit for that year. Interesting question: Is the contribution for purposes of 404 the entire contribution amount, or do you exclude the imputed earnings portion of the corrective contribution? Seems like you would.

I propose that the analysis under section 162 is that the contribution is a deductible expense because it is an expense of maintaining plan qualification. Or looked at another way, it is a payment to settle a dispute over proper plan benefits. I have not gone to authority under section 162 to see if the proposed analysis fits.

If you dip into forfeitures to find the money for the correction, you don't get another deduction. It is also a separate question whether or not you can use forfeitures forfeitures for a correction. I bet that the plan document specifies how to use forfeitures and I bet that correction of errors in prior years is not among the specified uses. However, I bet that the IRS would allow use of forfeitures for correction under at least some circumstances if you file with the IRS under Rev. Proc. 2001-17. Doing it on your own is a bit uncertain.