Deduction Limit under 404(a)(7) & Possible exemption from excise tax

[Dennis Povloski]

Since everyone's tires of talking about 412i plans...ummm...I mean 415 limits....can we talk deduction problems?

Here's my situation:

Client has both DB & 401(k). Outsourced actuarial firm (us) never new about the 401(k) plan. By random chance, in our annual data request from the TPA, we saw a note hinting to the existance of a 401(k) plan. After discussion with TPA, we discovered that matching contributions were being made to the 401(k). Client had coincidentally decided to make a very large contribution to the DB plan.

The DB minimum was far below the 25% deduction limit. The DB minimum + the Matching contributions were below the 25% deduction limit. However since they contributed well above the minimum in the DB plan, they now have a non-deductible contribution.

I know that in the case of a lone DB, there is an exemption from the excise tax if the DB contribution is less than the Accrued Benefit Full Funding Limit (which is the case here), but I don't know what happens when a DC plan gets thrown into the mix.

I did see in the ERISA Outline Book that there is also an exemption on the DC side if the non-deductible does not exceed matching contributions made for the year (or something like that), but I'm just to green to properly advise on this situation.

In the end, I advised the TPA to work with the client's CPA to find the best solution, but I would like to know better for next time.

Thanks for any input!

[Blinky the 3-eyed Fish]

See 4972© for situations to avoid the excise tax.

[Guest FLMaster]

I lived with 404(a)7 for several years. In most cases you end up deducting the DB plan, pay no excise tax due to 4972 © (which blinky pointed out) and you lose the deduction on the employer contribution to the DC plan to pick it up in a future year. Hope this is helpful.