Employer Eligibility Failure

[Guest Annette Leerhoff]

We have a client that established a sole 401(k) plan but do to controlled group rules was ineligible to establish. The plan was thus terminated. What is the correct method for correction regarding the return of employee, and employer contributions (i.e. 1099-R preparation) and the deductibility of the employer contribution on the tax return.

Thank you.

[Guest Sieve]

Controlled group rules normally would not make the employer ineligible to establish a 401(k) Plan--what you describe is probably just be a Section 410(b) failure, and you can't get out of a 410(b) failure simply by terminating the plan and treating it as if it never existed. I think you may have a much bigger issue to fix. (An employer eligiblity failure would be like a for-profit establishing a 403(b) Plan, or a governmental entity establishing a 401(k) Plan.)