Sole Proprietor 401K questions

[Guest J Samuelson]

I have a couple of questions regarding a 401k plan for a sole proprietor. First, if a sole proprietor defers more than the allowed $10,000, how long do they have to have the money returned to them without 10% penalty (March 15 or April 15 of the following year?) Second, if the tax return for the past three years is amended for lesser Schedule C, and the ER has been putting in the max 15% profit sharing contribution had been allocated, how do we correct for a lesser allowed 15% based on lesser Self-employed income? Is there a 10% penalty for those years for contributing too much or can the excess be returned to the employer? Any assistance in this matter would be appreciated!

[Ervin Barham]

Deferrals in excess of the 402(g) of 10,000 must be returned by April 15 whether it is a sole proprietor or corporation. That limit relates to the individual.

With regard to the second part of your question, you have hit on an interesting issue. Contributions may be returned upon a mistake of fact, a failure to qualify initially, or a failure to be non-deductible.

A mistake of fact (as defined by the IRS) has been narrowly interpreted to mean a mathematical type error. But there isn't a whole lot of guidance. My information states that to be returned for non-deductibility, the IRS must disallow the deduction.

See Code Section ©(3) and 4980©(2)(B)(ii).

[This message has been edited by Dave Baker (edited 07-30-99).]