Guest JL Posted March 7, 2000 Posted March 7, 2000 A rather small 401(k) plan with no HCE's exceeds the 15% of aggregate wages deduction limit with the 401(k) and matching components alone for calendar year 1999. The matching formula is discretionary (not fixed unlike an earlier posting). Assuming the plan provisions don't conflict with the following options, some of the current thoughts are as follows: (1) The employer could scale back on the match and be within the deductible allowance (massive PR problem even if they get participants to voluntarily scale back on 401(k) deferrals in the year 2000 and "make up" the 1999 lowered contribution next year), (2) make a nondeductible contribution and pay the 10% excise tax, then scale back on the year 2000 401(k) levels to a point where the 1999 + 2000 match deduction is within the year 2000 allowance. What do all of you think about option (3) refund 1999 deferrals to a few amenable participants in the same manner of excess contributions reportable on the year 2000 1099-R taxable in 1999(all the 1999 deferrals were deposited prior to 12/31/99). Under this scenario, would the 10% non-deductible tax still apply if the refund were done before 3/15/2000? Would earnings be also refunded (and would it be taxable in year 1999 or 2000)? How about option (4): Return a portion of deferrals to the corporation (for refund to the participant) and amend the 1999 W-2's (should earnings be returned?) Any comments or thoughts would be greatly appreciated!
Guest Posted March 7, 2000 Posted March 7, 2000 generally, once $ are in a plan, that is it, so I don't think you can simply 'refund' the deferrals. it doesn't sound like you failed the test. exceeding the limit doesn't sound like a valid reason for a refund/return of deferrals. remember, there is nothing 'wrong' with making a non deductible contribution, it is just there are penalties, and you keep carrying that amount into future years. if plan allows for post tax contributions I suppose you could reclassify deferrals as after tax contributions, (therefore no longer counted toward 15%) but again, what justification? Again, it doesn't ound like you can get away with that idea. The one plan I work on with a 100% match we have capped deferrals at 7%. end discussion. I think your only real alternative would be to put in a money purchase plan to make up some difference for whatever cap you put on deferral/match. sorry, its great to have people defer, but the law discourages putting away too much towards retirement, if everyone does it!
davef Posted March 8, 2000 Posted March 8, 2000 Can you rely on IRC 4972©(3) to support the return of matching contributions to the employer (assuming the plan document conditions contributions on deductibility)? I realize there is an issue as to whether the IRS has to formally disallow the deduction, but the only rulings on this issue have dealt with DB plans. The IRS has never issued guidance on how to request ruling on disallowing a deduction under a DC plan.
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