DB/DC contribution over deductible limit

[Calavera]

W2=100,000

MRC = 100%UCL = 50,000

150%UCL = 80,000

1. The deductible contribution is 150%UCL + 6%W2 = $86,000 (correct?)

2. Client made $105,000 as 150%UCL + 25%W2. Since DC plan contribution is over 6%, 404(a)(7) applies.

What contribution amount is subject to excise tax? Is it $19,000 (25%W2-6%W2) or is it $49,000 ($19,000+ $30,000 (150%UCL-100%UCL))?

Does the non-deductible contribution have to be removed from the plan's asset (DC only, DB only, both)?

If $49,000 is subject to excise tax, will paying excise tax on $19,000 and removal of $19,000 from the DC plan's asset put you in #1 above and make the full 150%UCL deductible?

[Andy the Actuary]

Were all contributions made during the respective plan years or were some of the contributions made after the close of the plan year in question but deducted?

[Calavera]

Let's break it down to two situations:

1. DC and DB contributions were made during the Plan Year

2. DC contributions were made during the Plan Year and DB contributions were made after the end of the Plan Year but before 4/15.

Both clients filed their taxes deducting $105,000. I need to give them some idea as to how to fix it besides just telling them that they need to talk to their attorney and/or tax advisor.

[Andy the Actuary]

The following is food for thought since I misplaced by circular 230 notice.

Case 2. Can you amend 2007 1040 and claim DB contribution in 2008?

Case 1. Notice 2007-28

A-8. When employer contributions to defined contribution plans (other than elective deferrals) exceed 6 percent of compensation of participants in those plans, [a]the amount of employer contributions to defined contribution plans to which the combined limit of § 404(a)(7) applies is equal to the amount of employer contributions for the plan year less 6 percent of compensation of participants in those plans. Thus, the combined limit of § 404(a)(7) (i.e., the greater of 25 percent of compensation, or the contributions to the defined benefit plan or plans to the extent such contributions do not exceed the amount necessary to satisfy the minimum funding standard for the defined benefit plans, treating a contribution that does not exceed the unfunded current liability as an amount necessary to satisfy the minimum funding standard for each defined

benefit plan) applies to the [c] total of employer contributions to defined benefit plans and employer contributions to defined contribution plans (other than elective deferrals), less 6 percent of compensation of participants in the defined contribution plans.

[a] ( 25%-6%) of 100,000 = 19,000

404(a)(7)=25% of 100,000 or 50,000 = 50,000

[c] 105,000 - 6% of 100,000 = 99,000

So, excess 404(a)(7) = (99,000-50,000) = 49,000 and 19,000 is from DC and 30,000 from DB. In short, you don't get the 150% single plan deduction.

Question: Was the 25% contribution voluntary (i.e., PS) or mandatory (i.e., money purchase pension)? If you had to make the 25% and the 412 minimum (without regard to UCL), perhaps you could reduce excise taxes?

[Calavera]

In the absence of circular 230 notice you can always start from the Schedule SB disclaimer: To the best of my knowledge...

Case 2: So, 30,000 of the DB contribution should be counted as 2008 contribution; 1040 should be amended

Case 1: This was my reading of the Notice 2007-28 as well.

Does the non-deductible contribution have to be removed from the plan's asset (DC only, DB only, both) or does it become the part of the asset after you pay excise taxes?

Another variation of the Case 2 if both contributions are made during the year and we are still in that year, could $19,000 with proper earnings be returned back to employer on the fact of error or non-deductibility or something else (and I mean something else legally).

[Andy the Actuary]

In the absence of circular 230 notice you can always start from the Schedule SB disclaimer: To the best of my knowledge...

Case 2: So, 30,000 of the DB contribution should be counted as 2008 contribution; 1040 should be amended

Case 1: This was my reading of the Notice 2007-28 as well.

Does the non-deductible contribution have to be removed from the plan's asset (DC only, DB only, both) or does it become the part of the asset after you pay excise taxes?

Another variation of the Case 2 if both contributions are made during the year and we are still in that year, could $19,000 with proper earnings be returned back to employer on the fact of error or non-deductibility or something else (and I mean something else legally).

On what basis would you remove the contributions? I do not believe that untimely removal of nondeductible contributions would fly. There is an old Rev. Proc. on the conditions whereby contributions can be returned but I can't immediately put my paws on it.

[Andy the Actuary]

If DC plan was a "pension" plan (i.e., if contribution was required), you may be able to escape federal excise tax on any nondeductible portion and simply carryforward deduction to 2008.

[Calavera]

Thanks Andy!