Carry forward non-deductible PS contributions

[Guest sritts]

If a profit sharing plan has non-deductible contributions in one plan year and carries them forward to the next, the plan sponsor still pays a 10% excise tax correct?

[david rigby]

I thought "deductible" referred to the plan sponsor's tax year rather than the plan year. IRC section 4972. Ignoring that distinction, the answer to your question is probably Yes, but read the 4972 carefully, and references to 404. Also not sure what you mean by "carries them forward".

Not sure if you are asking, but, if applicable, the 10% excise tax should only apply once, not carried over to subsequent year.

[Guest sritts]

Thanks

[Belgarath]

Pax, can you clarify a bit? I'm not sure if I'm understanding what you are saying. Take the following example - somewhat far-fetched, but possible. You have a 1 person plan - corp or sole prop, who contributes 60,000 to his profit sharing plan in 2003, and his income works out such that only 35,000 can be deducted. So he pays the penalty tax of 10%, or 2,500. In 2004, he has no income. I don't read 4972© to waive another 10% penalty for 2004. I read it to apply for every year until it becomes deductible under 404. Do you have a different opinion? Thanks.

[mbozek]

If the excess contributions are made between beginning of the tax year and the filing of the er's tax return for the prior tax year, the employer can deduct the full amount deductible under IRC 404 for the prior tax year and the excess can be deducted for the tax year in which the contributions are made up to the maximum deduction permitted under IRC 404 without payment of the 10% penalty tax.

[Kirk Maldonado]

mbozek:

I think your statement is a bit overbroad. If the contributions were made for the current year, you can't deduct them in the prior year. Lucky Stores Inc. v. Comm'r, 107 T.C. No. 1 (1996) and American Stores Co. v. Comm'r, 108 TC No. 12 (1997).

Of course, if it was not clear for which year the contributions were made, then your approach might work. In my experience, often it isn't clear the year to which the contributions relate.

[mbozek]

I dont understand your response. My understanding of IRC 404(a)(6) is that employer contributions to a qualified plan made between the beginning of the er's tax year and the date for filing the tax return can be deducted in either the prior tax year or the tax year year in which they are made. Rev. Rule 76-28. To the extent the er claims the contributions as deductions on the prior year's tax returns they are deducted in such year. Any excess amount not claimed as a deduction on the prior year's return can be claimed as a deduction for the er tax year in which they are made since contributions are always deductible in the employer tax year in which they are contributed. See Rev. Rule 76-28. Example: calander year employer with calander yr PS plan contributes 60k to plan on March 1, 2004. Max deduction of 40k is permitted for both 2003 and 04 tax years. Employer claims 40k as a deduction on the 2003 tax return filed on 3/15/04 and then claims 20k as a deduction for covered comp earned in 2004 when the 2004 return is filed on March 15,2005. NO 10% penalty is applied to the 20k contribution because it is deductible for 2004.

It has been a while since I read it but I thought Lucky stores related to what compensation could be attributed to a particular employer tax year for deduction purposes under IRC 404(a)(6), e.g., comp earned in a plan year which ends after the close of a tax year is not counted as covered comp for deduction purposes in such tax year even if the plan year ends before the date for filing the tax return with extension. If plan years ends on 6/30 but the tax year ends on 12/31 then only comp earned to 12/31 is counted for deductible contributions for the er tax year ending 12/31.

[Kirk Maldonado]

MBozek:

Let's take an example. Assume that the employer makes $100,000 of Section 401(k) contributions to the plan for the first three months of the year. Those amounts cannot be deducted in the prior year, even though they would fit all of the criteria in your posting.

The reason that I cited the decision in Albertsons is because your prior postings make it seem like the only thing that counts is when the contribution is made. For the contribution to be deductible in the prior year, it has to be attributable to the prior year, which is exactly the issue in Albertsons.

[mbozek]

Kirk: I think we are talking about apples and organges here. I dont disagree that comp earned after the end the of the tax year is not counted for the purpose of the deduction under 404(a)(6) (which was noted in my response) but my posting was directed at employer PS contributions for two consecutive tax years where the contribution for both years is made before the due date for filing the tax return for the first year.

Example: employer with calander tax year has $100,000 k of covered comp for both 2003 and 04. ER contributes 50k to the plan on Mar 1, 04 and deducts 25k as a discretionary PS contribution for 03 under Rev. Rul 76-28. Remaining 25 k is a deductible contribution for 2004 under Rev. Ruls 76-28 and 90-105 and the cases you cited because it is made for covered comp earned in 2004 and is contributed during the 04 tax year. I am not aware of any requirement that prohibits an employer from making a deductible contribution before covered comp is earned in the tax year.

[Kirk Maldonado]

mbozek:

I'm pretty sure that there is something to that effect in the tax shelter rules that have come out recently.

[Guest quinn the car fixer]

i could be wrong, but i thought i read that if you have $'s in the plan, trust, and it is not allocated that you have a potential disqualification issue?

what am i thinking of? or am i totally off base?