Correction and Deductions

[Randy Watson]

Plan sponsor made true-up contributions to a 401(k) plan when the plan document did not provide for true-ups. We plan to correct under VCP with a retroactive plan amendment that permits true-ups. Are there any problems with the fact that the plan sponsor took a tax deduction for the true-ups? It seems to me that submitting under VCP would correct any qualification issues and thus preserve the deductability of the contributions. Any comments?

[mbozek]

Rev. rule 76-28 provides that once a contribution is claimed as a deduction on the er's tax return it is irrevocable and cannot be changed. Why not self correct instead of filing under VCP?

[Randy Watson]

The two options under SCP would be to have the participant's forfeit the true-up (which the sponsor is not thrilled about) or do a retroactive plan amendment. Unfortunately, the retroactive plan amendment that we need to draft is not the type of failure that can be corrected by a retroactive plan amendment under SCP.

Assume for a moment that the failure is corrected under VCP...do you see any deductibility issues?

Thanks.

[mbozek]

There never were any deduction issues since the contribution met the requirements of 76-28 and cannot be changed even if the plan is not amended.