Prefunded Profit Sharing in excess of allocable

[Guest Moira]

One of the plans I work with funds their match and profit sharing contributions on an ongoing basis throughout the plan year, and for 2005 they overfunded the allocable contributions by in excess of $13,000. Can the trustee reclassify contributions received in 2005 as 2006 contributions? We have not done a 2005 Form 5500 yet, although I assume the employer deducted the entire 2005 contribution amount on its income tax return.

If the trustee can reclassify the excess amount as a 2006 contribution, I realize the employer would need to file an amended tax return. Is this operationally allowable? And are there other ramifications I should be concerned with?

Thanks for your thoughts.

[Guest mjb]

For deduction purposes contributions are deductible for the employer tax year in which they are made or for the prior tax year if the contributions are made by the date for filing the tax return with extension for the prior yr. Rev. Rul 76-28. Excess contributions to a DC plan can be carried forward and deducted in a suceeding yr unless the contributions exceed the 415 limits. Notice 83-10 F-1 & 3. In addition, the excess contributions are subject to the 10% excise tax of IRC 4972 for each year until removed or deducted. There is a separate issue of whether you can claim the deduction for the excess contributions in 2006 if it was taken in 2005. Rev. Rul 76-28 provides that a deduction claimed on a tax return is irrevocable and cannot be changed. Your client needs to consult with the accountant to see if the excess can be claimed in 2006 after the 2005 return is amended.

[Archimage]

Is your match and/or profit sharing amounts defined in the plan document? If not and the amounts are purely discretionary, you need to allocate them based on the provisions of the plan.