PS Plan Deduction

[David]

Client deposited $10,000 PS contribution in Jan. 2005 for the 12/31/04 ye. Some of that contribution was necessary to provide the NHCE's with the 3% SH contrib the plan calls for.

The CPA forgot to deduct the 10,000 on the 2004 tax return. Client says that amending the 2004 tax filing is very complicated because of shareholder K-1's etc. so that is not an option.

Can the 10,000 be credited to the 2004 plan year to meet SH requirements but deducted in the 2005 plan year??? I am thinking that the 10,000 would count towards the 2005 404 limit unless there is a way to carryover a prior year contribution that was deductible but not deducted? (As opposed to carrying over an non-deductible amount.)

I would really appreciate some input on the way to handle this situation. Thanks.

[mbozek]

Under IRC 404(a)(6) employer can take a deduction for the tax year in which a contribution is made to the plan or to the prior tax yr if the contribution is claimed on the er's tax return for such yr. See Rev. rul 76-28. 04 Contribution made in Jan 05 can be deducted on 05 tax return along with 05 contribution subject to the deduction limit of 25% on covered comp paid in 05.

[David]

Thanks for your help Mbozek.

Just to make sure I understand, are you saying that the 1/05 contribution will count against the 2005 25% of pay 404 limit?

In other words, if 25% of pay is $45,000, the contribution for the 2005 plan year would be limited to $35,000 because we are also deducting (on the 2005 tax return) the $10,000 2004 contribution made Jan. 2005 and not deducted on the 2004 tax return?

[mbozek]

Yes.

[AndyH]

This doesn't answer the question of whether or not the safe harbor requirements are satisfied for 2004, it seems to me, since the contribution is being designated for 2005 at least for deduction purposes.

[David]

Andy,

It will still be a 2004 contribution, it will just be deducted on the 2005 tax return.

[AndyH]

Right; I'm just wondering if violates any requirement; I'm not aware that it does but I would look at that before assuming it is ok.