Nondeductible Contribution

[Blinky the 3-eyed Fish]

I have a situation where a client contributed more than the amount deductible last year and deducted that contribution on the tax return. My question is for 404 purposes is the excess considered a nondeductible contribution for the next year?

When I think of a nondeductible contribution, I think of a contribution that is in the trust but not yet deducted. In this case the contribution is in the trust and is deducted, although it should not have been.

I think the answer is that the tax return should be amended, or as the actuary I should assume it will be amended, to revise the deduction, and that I should indeed treat the excess as a nondeductble. Any thoughts?

[MGB]

I agree with you.

In fact, in many situations, the actuary wouldn't even know what deduction were taken by the plan sponsor. It is what should have been deducted that should be used in any later calculations of deductibility based on the former contributions.

Note: Technically, an enrolled actuary does not have the authority to say what the maximum deduction is. There is nothing in the law or granting of the EA status that provides the actuary with this authority (we are enrolled to practice before the IRS/DOL in certain matters of ERISA -- IRC 404 is not included in that list). The actuary can provide calculations, but is in no position to be the professional giving the last word on it. Any actuarial communication about the maximum should include the caveat that the plan sponsor should have tax counsel review the appropriateness of the deduction. If a plan sponsor is taken to court by the IRS, they do not have a defense that they were just following the actuaries' determination of the maximum.

[Mike Preston]

My copy of Treasury Circular 230 specifically includes 404. Not that I disagree with the susbstance of the comment, though.

"Practice as an enrolled actuary is limited to representation with respect to issues involving the following statutory provisions:

401 (qualification. of employee plans)

403(a), (relating to whether an annuity plan meets the requirements of section

404(a)(2))

404 (deductibility of employer contributions)

405 (qualification of bond purchase plans)

412 (funding requirements for certain employee plans)

413 (application of qualification requirements to collectively bargained plans and to plans

maintained by more than one employer)

414 (containing definitions and special rules relating to the employee plan area)

4971 (relating to excise taxes payable as a result of an accumulated funding deficiency under section 412)

6057 (annual registration of plans)

6058 (information required in connection with certain plans of deferred compensation)

6059 (periodic report of actuary)

6652(e) (failure to file annual registration and other notifications by pension plan)

6652(f) (failure to file information required in connection with certain plans of deferred compensation)

6692 (failure to file actuarial report)

7805(B) (relating to the extent, if any, to which an Internal Revenue Service ruling or determination letter coming under the herein listed statutory provisions shall be applied without retroactive effect)

and 29 US.C. 1083 (relating to waiver of funding for nonqualified plans)."

[Guest David M. Lipkin]

As a "reality check", in the vast majority of these situations, the return will never be amended, even though it is technically wrong. This could make the need to adjust assets for non-deducted contributions go away. (per 404 regs)

David