Excess Profit Sharing Money's/ Can it be returned

[sdix401k]

I have a client who added a 401k feature to the reitrement plan in 2003. The employer accidently sent in the full $40k for 2003 as a profit sharing contribution. The employer foregot to designate $12k as salary deferral. The issue is the PS is not self directed and the 401k is self directed.

Can $12k be reclassifed as a deferral? ( Assuming the W-2 is changed. ) If there was a gain/loss on the funds in the PS how would that be handled?

Would this better handled as an excess addtion?

The TPA firm is telling him that the money cannot be re-classified and it cannot be returned to the employer with or without a penalty. The TPA is telling him that the funds must be allocated to all other eligible particpants.

Thoughts???

[Guest Happy Actuary]

It c/b time to hire a new TPA. While their answer m/b the technically correct one, I could imagine a more practical reclassification into salary deferral. I'd probably move the associated investment income.

I'd prefer, however, not to return the $ to the Employer, but that's just my view,

[sdix401k]

Thats what I would think as well. The TPA cited Revenue Ruling 80-155 which I have read and seems to have nothing to do with the situation??

Thanks in advance.

[Mike Preston]

I have the feeling that this client deposited their own $40,000 early in the year and even though the funds were deposited into the pooled account, wants to have THAT $40,000 (or, $28,000 if the deferral is to be netted against it) as being attributable to him/her while the contribution for "others" was delayed until a later time period.

That is the classic scenario where 80-155 applies and it applies to tell the client that treating the owner's contributions in a pooled account differently from others is a disqualifying event.

But, back to the problem, I would vote for what the TPA said in the absence of an attorney directing the "correction". This client sounds like a disaster waiting to happen, if you ask me (which I know you didn't). How come the client is contributing $40k in the first place? If it is a 401(k) plan to do so is like putting a sign on one's forehead saying: "Where's my sign?"

[sdix401k]

Actually the profit sharing contributions were over contributed for all employees.

The employer was pre-funding the contribution based on last years numbers.

The gain associated with each particpnats contribtuion would be still given to each particpant.

The difference or the over contribution would be what they wanted to re-classify as a salary deferral.

Ex: I fund PS with 87K, I only needed to defer 80K. I want to recalssify 7K as salary deferral???

The gain on the 7K will still be given to each particpant.

Therefore since all particpants accounts are being valued the same I do not see how Rev 80-155 pertains???

Thanks in advance.

[Mike Preston]

In that circumstance, I agree that 80-155 probably doesn't apply. What type of plan sponsor? Sole Prop? Corp? LLC taxed as a partnership? Other?

[sdix401k]

It is a professional corp. ( Medical Practice )

[Mike Preston]

Then I don't see how it can be restructured. The client is not gonna be happy.

[sdix401k]

When you say restructured, I assume that you mean the contribution cannot be reclassified?

Can you elaborate on why the structure of the company would determine if the contributions could be or not be restructured?

Your right, the client is not happy at all, either is the accountant.

Thanks!!

[Mike Preston]

You say tomAto, I say tomahto.....

Restructured, reclassified, do over, mulligan, whatever.

You just can't do things like that in the corporate environment. There is a paper trail that makes doing so almost impossible.

In a partnership or sole proprietorship environment, however, checks can be, and frequently are, cut directly from the bank accounts of individuals. When that happens, whether the monies are deferrals or employer contributions is subject to reclassification.

[sdix401k]

Thanks for the information!!

[E as in ERISA]

What do you mean by "sent in" the full $40,000 as a profit sharing contribution? There should be legal paperwork somewhere that designates how much money should be deposited. E.g., the plan terms, a 401(k) elective deferral form, a board resolution or other formal authorization of the profit sharing contribution, etc. Those should be determinative of how the money should be designated, even if someone informally indicated otherwise when they sent the money in.