Reversion of nondeductible contribution

[Guest saeissler]

I am taking over a defined benefit plan. For the 12/31/04 to 12/30/05 plan year the employer made a contribution and then took some back on the grounds that it was nondeductible. The plan document says that nondeductible contributions MUST be returned to the employer. The schedule B was not filed, because assets are less than $100,000. In reviewing the work, I find that the maximum deduction was overstated. So the amount returned to the employer doesn't cover the whole nondeductible contribution. The amount is small - say $500 difference. The client will need to pay an excise tax on the amount of nondeductible contribution remaining.

I will need to file a Schedule B so that I can attach the required attachment to back up the return of excess contributions. Since I haven't yet filed the schedule B I can change the RPA current liability interest rate to increase the deductible limit, to avoid the excise tax. But can I use any rate in the range even though it looks ridiculous, to come up with the number I want - and if I do that, would I still be right that the excess I come up with is the nondeductible contribution that can be returned. I don't see anything to prevent that action, but it doesn't seem in the spirit of things?

[david rigby]

For plan years beginning in 04 and 05, the rate for 404 unfunded CL has a separate range from the rate for the 412 UCL. They can be chosen independently, as documented in previous discussion threads, anywhere within the applicable range for each.

If you have not filed the Schedule B, you have not "chosen" the rate. However, the Schedule B has nothing to do with IRC 404; revise your 404 CL if necessary, document your files and your communication to the plan sponsor.

[AndyH]

The plan document says that nondeductible contributions MUST be returned to the employer

I have never heard such a thing. Are you sure that is what it says, or are you referring to "mistake of fact" language? Nondeductibility is not a mistake of fact, as I understand the IRS position. And I don't think you can avoid the excise tax either.

Regarding CL, you don't report the CL used for 404 on the B, at least pre-06. You can use one rate for 412 that goes on the B and another for 404.

(sent before I saw pax's reply)

[Guest Steve C]

The "MUST be returned" document language ties in with Section 4.02(3) of Rev Proc 90-49.

[Guest saeissler]

Yes, Andy, I was using Rev Proc 90-49. This nondeductible contribution was returned on the basis that it was de minimis - less than $25,000. Basically, it can be returned if either the document says that a nondeductible contribution "MUST" be returned or there was a Board resolution signed before the contribution was made stating that the contribution was made based on its deductibility.