Using up an excess company contribution

[Bird]

As always, the ability to bounce ideas here is appreciated. Here's the scenario:

Plain profit sharing plan has a limit of the amount deductible under Code Sec 404. For 2008, the plan receives more than 25% as a contribution (FWIW, this is totally and completely the accountant's fault) and we allocate the 25% and carry over the rest. (Yes, the client and accountant were advised of the need to pay a penalty on the overcontribution.)

In 2009, the plan was restated onto an EGTRRA document that has no limit, other than 415 limits for the participants. No additional contributions were made. The carryover is less than the combined 415 limits, but more than 25%. I think from the plan's perspective, we can (must) allocate that carryover contribution in 2009 (it happens to be going to one NHCE; the owner had no comp)...and get on with the plan termination, which is next.

There would be an additional penalty in 2009 for the remaining overcontribution, and honestly I'm not sure if that theoretically hangs on forever if the plan goes away or what, but I don't see it as my problem.

Does anyone see problems for the plan and its qualified status if we follow this path?

[Mike Preston]

Sounds about right to me. Of course, what you have said needs to be confirmed against the document's provisions, but it sounds like you have already done that. Reading between the lines, your GUST document provides that amounts in excess of the deductible limit (or maybe it is a hard coded 25%?) are not allocated and, instead, are held in suspense with the intent that they be allocated in the next year. Your EGTRRA document doesn't include that language, so you naturally are free to allocate up to the 415 limit. I don't see any other course of action available to you.

[Belgarath]

Have you broken the news to the owner yet? They always just LOVE it when you tell them that their NHC grunt is going to get an extra umpteen thousand dollars...

[Bird]

Have you broken the news to the owner yet? They always just LOVE it when you tell them that their NHC grunt is going to get an extra umpteen thousand dollars...

Ha! This petty and small-minded consultant (me) is looking forward to it. Imagine your worst clients all rolled into one - late info, wrong info, missing info, unresponsive, and he apparently hires the cheapest accountant in the area, who is also inattentive and unresponsive, and is actually the direct cause of this result (long story). Poetic justice.

[Belgarath]

Ah, sweet revenge - a dish best savored cold. Enjoy!