Excess Contribution to Small Business (single owner) 401(k) Plan

[Guest neilcap]

In 2003, I over contributed to the profit sharing part of my company's 401k plan. My company is an LLC and I am the sole owner.

I simply put too much money (about $7,000) in the 401K during December 2003 based on my earnings.

How do I go about withdrawing these funds and what reason do I use to explain to the IRS why I am doing this?

Thanks for your help.

[TBob]

What do you mean when you say that you over contributed? What limit did you exceed or test did you fail?

There are prescribed correction methods for these failures, etc. but more information would be helpful.

[Guest neilcap]

For some clarification - I have a 401(k) plan that is intended for self-employed or single owner businesses. Sometimes it's referred to as a Profit Sharing Plan with a 401(k) feature.

My understanding of the contribution limits is that I can contribute $14,000 (I'm 61) as my "salary deferral contribution" and up to 25% of my little company's earnings up to a max. of $28,000. My company made the $14,000 contribution in 2003.

Assuming that I would be able to put in the max for 2003, in December 2003 my company contirubted $25,000. Now, my accountant says I can only contribute $19,500.

I have two theoretical choices - roll over the contribution to 2004 or withdrawl the excess contribution. I'd prefer to do the latter.

Any ideas?

Thanks for your help.

[Appleby]

It appears your only option is to leave the excess in the plan and allocate it towards your year-2004’s contribution. Excess employer contributions cannot be returned to employers, except under very narrowly defined circumstances. See the thread at http://benefitslink.com/boards/index.php?showtopic=14199

[Mike Preston]

Neilcap, who helped you set up the plan? Whoever you set up the plan with should be able to help you through this. Hopefully, they have some qualified plan expertise. If not, then you really should find somebody with some qualified plan expertise to help you. Whoever told you that you should contribute the $25,000 in December is really the problem. But I suspect you already know that.

The reason you need somebody with qualified plan experience is that the "solution" (if there is one) depends on reading the document to see what the precise provisions call for in this circumstance. Does the plan allow for after-tax contributions? Are there other employees (I suspect not, but your description isn't precise as to this)? What does it say about how to handle allocations in excess of the deductible limits? Does it have "mistake-in-fact" language?

Many of these issues are unfamiliar territory for anybody other than somebody who understands qualified plans quite well.

You may very well be looking at not only not being able to deduct the full amount of your contribution, but also an excise tax for making a non-deductible contribution.

Good luck.