Return of Excess Employer Contributions - PSP

[Guest DianeTPA]

Hello,

I've transitioned from a TPA to a financial custodian, and need to make sure that I'm reporting a return of excess Employer Contributions properly.

ISSUE:

A Profit Sharing Plan has been over funded. The Employer and his plan advisor are requesting the custodian to return the excess employer contribution to the Employer. The Employer is a Sole Proprietor and the owner is the sole employee and participant. (Also, the ER & TPA are aware of the issue of Form 5330 & 10% penalty tax).

QUESTION:

Does the custodian report the return of excess Employer Contribution as a taxable withdrawal to the Employer or to the participant using 1099-R code 8/P? Or is the return of excess PSP Contribuiton to the Employer a non-taxable, non-reportable withdrawal?

Thank You for all of your inputs

[Guest Sieve]

How is the PSP "overfunded"?

[Guest DianeTPA]

How is the PSP "overfunded"?

Employer exceeded the 415 Limit of 25% of Pay or, in this case, 20% of Earned Income.

[Guest Sieve]

I would answer these questions:

1. What does the Plan say about how to treat a violation of Section 415?
   
2. On what basis can the employer request a return of assets so that the 415 violation is considered never to have occurred? Is there a mistake of fact?
   

[Guest DianeTPA]

I would answer these questions:

1. What does the Plan say about how to treat a violation of Section 415?
   
2. On what basis can the employer request a return of assets so that the 415 violation is considered never to have occurred? Is there a mistake of fact?
   

Does anyone else have a response to my question?

[Kevin C]

1. It sounds like your client exceeded the deduction limit, not the 415 limit. The 25% of pay 415 limit went away after 2001.

2. When was the deposit made? The situation may be different if the deposit was made during the plan year vs after the end of the plan year.

3. If your client proceeds with withdrawing the funds, they need to make sure everything done complies with the plan provisions regarding return of employer contributions, which Sieve referred to. Otherwise, they will create a bigger mess.

[PLAN MAN]

Does anyone else have a response to my question?

Yes, I have a response. Proceed carefully because returning an excess employer contribution to the employer is generally not allowed. If the contribution was made after the end of the plan year, it should be applied as a contribution for the plan year in which the contribution was made to the plan.

Check the plan document, if it is a prototype plan, the language usually requires the IRS to determine the contribution is not deductible before any funds can be returned to the employer. The contribution stays in the plan and is applied to future years' contributions. The employer must have a legal basis for requesting a return of contribution.

You are correct on the other point, because the employer contributed more than they can deduct for the particular year, that must be reported to the IRS and a penalty paid.

[Guest DianeTPA]

Thank you all.