Undeducted Contributions Upon Plan Termination

[Guest DCquestioner]

One man DB plan. The client has made contributions exceeding the 404 maximum deductible contribution by $80k+. The client wishes to terminate the plan. The plan appears to be overfunded on a termination basis as well.

I understand what happens to the excess assets in an overfunded plan, but I'm not sure how to deal with the undeducted contributions. He can't jsut take them out. There was no mistake in fact which could give him a basis for applying to disallow the deduction.

Somewhere I thought I recalled amortizing them over an extended period and deducting them as an ordinary business expense, but I'm not sure where I got that from.

Anyone have any insight?

Thanks!

[david rigby]

He can't just take them out.

Does the plan language require/permit a contribution only to the extent it is deductible?

BTW, don't forget IRC 4972

[Guest DCquestioner]

The client has an accudraft prototype document. Under refund of contributions, it says:

"If the Plan fails to initially satisfy the qualification requirements of Code 401(a) and the Employer declines to amend the Plan to satisfy such requirements, contributions made prior to the date such qualifiecation is denied must be returned to the Employer within 1 year of the date of denial, but only if the application for qualification is made by the time prescribed by law for filing the Employer's tax return for the taxable year in which the Plan is adopted, or by such later date as the Secretary fo the Treasury may prescribe. If a contribution is attributable in whole or in part to a good faith mistake of fact, including a good faith mistake in determining deductibility under code 404, then an amount may be returned to the Employer equal to the excess of the amount contributed over the amount which would have been contributed had the mistake not occurred. Earnings attributable to any such excess contribution will not be returned, but losses attributable to the excess contribution will reduce the amount so returned. Such amount will be returned to the Employer within 1 year of the date the contribution was made or the deduction disallowed, as the case may be."

Even though the contribution is not deductible, it still sounds like a mistake in fact must be the reason it was not deductible.

In this case, the client was told by his CPA to put in the contribution without having any actuarial calculations done. Does that constitute a mistake in fact?

[david rigby]

In this case, the client was told by his CPA to put in the contribution without having any actuarial calculations done. Does that constitute a mistake in fact?

Sloppy? Malpractice? You decide. BTW, has anyone discussed this with the actuary to see if the "excess" really is an excess?

If a contribution is attributable in whole or in part to a good faith mistake of fact, including a good faith mistake in determining deductibility under code 404, then an amount may be returned to the Employer equal to the excess of the amount contributed over the amount which would have been contributed had the mistake not occurred.

The PA should probably get its ERISA attorney to review this, then take the attorney's advice. Just a thought.

[Guest Sieve]

Doesn't look like a mistake to me--the contribution was made without regard to deductibility. And, the IRS has not disallowed the deduction, so that's no basis to return.

All deductions have to be under IRC Sectin 404, not 162 (although they still must meet 162 requirements: ordinary & necessary). And, if this is a self-employed individual, there may be no deduction permitted at all for the excess--see discussion at: http://benefitslink.com/boards/index.php?s...ic=39677&hl