404 excess

[Earl]

client put in more than 25% of pay before the end of the year.

10% excise tax unless return as mistake of fact by 3/15/06. There is no mistake of fact.

What do you do with the money? Allocate but it's not deductible? Hold till next year and include in allocation and deduction?

thanks

[Guest mjb]

Earl: your client's tax problem is why contributions should be made at the beginning of the tax yr since the excess can be allocated to current yr as well as prior tax yr. By the way who told the clent to make the contributions at the end of the tax yr?

[Earl]

The contribution for 2005 made in 2005 exceeded 25%.

I gave him a 2005 estimate based upon comp numbers he gave me and, despite my telling him it was an estimate and not to fully fund until after 12/31/05, he funded it all. Comp numbers turned out to be too low to support estimated contribution.

So there are contributions for 2005 made in 2005 in excess of 25%. So 10% excise tax.

No one told him to fund it, in fact I told him not too. But he did.

So, how to treat the excess?

(And now he wants a 2006 estimate....)

[Belgarath]

Well, hard to say without knowing the precise plan language. Generally, I'd say you allocate based upon the language to the extent you don't exceed 415 limits. If after the allocation up to 415 max you still have some left over, then it stays in a suspense account until it can be allocated for 2006. And he pays the excise tax, and hopefully listens to you this year! And of course, reduces his contribution for 2006 to the extent there are nondeductible contribution from 2005 to be used up, so he doesn't run into the same pickle again. (We have the same problems now and then - you tell them until you run out of breath, and they plow right on ahead and do it anyway.)