Penalty for exceeding 415?

[Lori H]

I believe if a plan exceeds 415 the sponsor is required to move the excess to a forfeiture/holding account for future use. What if the plan is a one participant plan and no future contributions are going to be made and the sponsor wants to terminate? The plan exceeded 415 for multiple plan years starting in 2003 and ending in 2006. Would an effective remedy be to amend the tax returns, distribute the excess plus allocable yield, and file VCP? Total excess is $12000.

[Lou S.]

VCP sounds like the way to go to fix this. The IRS might accept your solution or they might require the excess to be treated as a reversion to the Plan Sponsor sunject to the excesie tax if it can''t be allocated to anyone.

[Lori H]

Thanks. Can you provide appx. what the excise tax penalty is?

[Lou S.]

A reversion of excess assets is more common in an overfunded DB plan but in some cases it can happen in a DC plan - usually when there are forfietures than can't be allocated for some reason - like no compensation for employees. The excise tax is generally 50% of the reversion - though it can be reduced in certain cases with a qualified replacement plan though that doesn't appear to apply in your case (see IRC §4980). The reversion is also considered income to the Plan Sponsor and the Excise tax is reported on Form 5330 (more information can be found in the instructions to that form).

Hope that helps.