Deductibility of contribution in excess of 415

[Richard Anderson]

In a one participant plan 35,500 was contributed during the plan year that ends 12/31/01. $500 to set up the plan account, and then an additional 35,000 later during the year. Does exceeding 415 cause the 415 excess to be non-deductible for the employer's 12/31/01 taxable year?

[Moe Howard]

No. If the $amount deducted is in compliance with IRC 404 then the deduction is allowed by IRS and it doesn't matter that it caused the participant's account to have an excess annual addition.

However the excess annual addition would have to be corrected and the excess annual addition could cause the plan to lose its qualified status.

[Belgarath]

Are you sure about this? I had always understood that under 404(j), no deduction in excess of the 415 limitation was permissible. In this situation, since you've exceeded 415, then I'd say you have a nondeductible contribution of 500, you'd have to pay the penalty tax, then carry over the 500 and deduct it in the next year.

[Moe Howard]

Belgarath, according to 404(j) you are CORRECT.

[Guest Illini]

The 1.415-6 reg says that if a 415 excess is corrected in one of the enumerated ways, the excess is not an "annual addition." 404(j) says that a deduction is not available for "annual additions" in excess of the 415 limits. As a result, it seems these sections should be read together to provide that if a 415 excess is properly corrected, it remains deductible if its fits within the otherwise applicable 404 limit.

Any thoughts on this analysis?

[Guest Tom Geer]

I agree with Illini if the correctioon is a reallocation to other participants for the plan year. If it goes into suspense, I don think it's deductible until allocated.