Excise Tax Penalty End Run?

[Fred Payne]

Client A has a paired, standardized MP and PS plan with a year end of 9/30. Sponsor is C Corp. Only one employee and one participant. Sponsor has already funded $30K of current year contribution. Sponsor now wants to install a DB plan for current year to make a $90K contribution. However, there's no way to take back the $30K contribution to the DC plan, precluding the $90K contribution.

If the corporation does not take as a deduction the $30K contribution to the DC plans, the deductible $90K contribution to the DB plan is possible. Sponsor is subject to excise tax for the $30K to DC plan--and this is a small price to pay for Sponsor to get an "extra" $60K of deduction. But this excise tax continues each and every subsequent plan year because reoccurring DB contribution never allows for an allocation of the $30K DC contribution.

Of the facts above I am certain. Now here are my questions. If we terminate the DC Plans and distributes assets, what happens to the $30K? It can't go back to the Corp presumably. Can it get rolled over to the participant? Does the Excise Tax problem simply go away, it being a one time event? So pretty good to me!

Does anyone have experience with this? Can you give me a siting?

Thanks very much.

[rcline46]

Two times, year deposited and year distributed.

And I think it is rollable, although no original deduction so it will be doubly taxed, which is a real bummer on top of excise taxes.

Once distributed, not in trust, so no excise tax.

[Fred Payne]

Do you have any Regs you could cite for me or Opinion Letters?

[mming]

I've seen documents that have a provision allowing a contribution that was made as a result of a "mistake of fact" to be returned to the Employer within 12 months of the date of the deposit. Perhaps adding such a provision can help if it's not too late? However, I'm not sure whether the excise tax for nondeductible contributions would still apply in such a situation.

[Fred Payne]

My understanding is that the IRS would be the one to determine if a mistake in fact has occurred. Notwithstanding whether the Plan provides for it or not, such contributions as determined by the IRS could be returned.

[Belgarath]

Be very careful with the "mistake of fact" approach. The mere nondeductibility of a contribution is NOT a mistake of fact. Take a look at Rev. Proc. 90-49, as well as IRS Notice 89-52, and PLR 9144041. I think you'll find that your situation won't allow use of this.