Money Purchase or Target plan deduction problem

[Belgarath]

Say you have a money purchase plan with a 25% formula. Granted that most people amended out of these, there are still some who have them because it is old and comfortable, like an old shoe, or because of employee or union situations where a mandatory contribution is desired or required. Like an old shoe, however, it may also be nasty and smelly.

The employer, for 2007, misses minimum funding deadline and undercontributes by $50,000. Understands penalties on the 5330 for missing minimum funding. However, under 404(a)(3)(A)(v), a money purchase plan is subject to the 25% deduction limit, rather than being able to use the 404(a)(1)(A) methodology (which they did use pre-EGTRRA). So, first, the employer must contribute the $50,000. Then must contribute the 25% under the formula - which is the maximum deductible. So there's a required contribution of $50,000 which cannot ever be deducted! Furthermore, there are arguably penalties every year for a non-deductible contribution of $50,000.

Now, they can amend the formula downward to use this up at some future date. They could also argue that the $50,000 isn't nondeductible, but is merely not currently deductible, and thus not subject to the penalty tax. It just seems completely unreasonable to have to take these approaches.

Anyone run into this before? Had conversations with someone at the IRS who actually knows something about it?