Excessive or unauthorized contributions

[Guest jvanheyde]

Encountered a situation involving the 2005 calendar year and an over contribution and over allocation of profit sharing contributions. More than one year has passed from the date of the contributions.

Plan is a safe harbor, 401(k) plan. The employer funded the plan entirely throughout the plan year (i.e., did not wait until the due date of the return). They were not keeping a good account of what went in.

When the allocation for 2005 was done in 2006, the owners/key employees were allocated a portion of the profit sharing contribution to get them to $42,000 limit (when combined with the 401(k) deferrals and safe harbor contributions). The staff was allocated profit sharing dollars under the same formula, and there remained unallocated $40,000 of profit sharing contributions The TPA proceeded to allocate the $40,000 to the staff only since the owners were maxed out.

The owners did not intend to give the staff any more than was required to get them to the $42,000. However, they didn't review the allocation report and didn't become aware of the problem until 2007.

Doesn't look like mistake of fact would help because the contributions have been in the plan for well over a year.

Have you ever seen something like this and what did you do to correct the unintended over allocation?

I'm looking for a way to keep the dollars there, but allocate them in 2006 plan year, even if it means paying a penalty and amending the 2005 tax return of the corporation.

Thoughts?

[rcline46]

In my opinion, if the 'extra' contribution was not in excess of 404 and was in the plan prior to the plan year end you are stuck. It does not even rise to 'mistake of fact' because there was no calculation error.

Just reduce the contribution by $40,000 for 2006. Oh, the owners can't max out? Tough. That'll learn them to prefund into the plan. They should use a money market account in the corporate name.