IRS Audit

[Lou S.]

We are having a husband & wife plan currently under audit and the agent is challenging the the allocations for owner and spouse both with comp over the 401(a)(17) limit.

Company made $98K PS - $49K each

Participants elected and deposited $5,500.

My understanding is that since the deferals force the allocation over the $49,000 415© limit for the year in question they are recharaterized under 414(v) as catch-up contributions. Auditor is stating there is a 415© violation for exceeding the limit.

I'm sure I've seen nearly this exact question asked before here but could not find it with a search on this "Retirement Plans in General" or "401(k)" sub-forum so I guess my seach skills just aren't very good.

edit - to add final treasury reg

It ssems to me clear under ---

1.414(v)-1)b)(1)(i) A statutory limit is a limit on elective deferrals or annual additions permitted to be made (without regard to section 414(v) and this section) with respect to an employee for a year provided in section 401(a)(30), 402(h), 403(b), 408, 415©, or 457(b)(2) (without regard to section 457(b)(3)), as applicable.

that this leads to recharaterization.

Has anyone had a problem with auditors when pointing this out? Do they continue to challege uder 415©?

[PensionPro]

From the IRS Web site:

IRC §415 Limitations:

Generally, qualified plans are not permitted to allocate contributions and other additions to plan participants in excess of the IRC §415 limitations. This limit applies to each participant, and is based on annual additions made during the plan’s Limitation Year.

The limit on annual additions made and allocated to each participant in defined contribution plans, as provided by IRC §415©, is the lesser of 1) the IRC §415 dollar limit or 2) 100 percent of the participant’s compensation for the Limitation Year. For purposes of this limit, the Limitation Year is a 12 consecutive month period that will be defined within the plan document, but is generally the same as the Plan Year.

Annual Additions, for purposes of this limit, generally include all employer contributions, employee contributions and forfeitures allocated to the participant. Finally, compensation is specifically defined under IRC §415©(3), with certain exclusions such as rollovers, with this definition required to be clearly set out within the plan document.

In addition, “ catch-up” contributions made to cash or deferred arrangements (i.e., IRC §401(k) plans) for individuals age 50 or over are not considered annual additions.

The consequences of exceeding the IRC §415 limit are that the plan will fail to retain its status as a qualified plan, resulting in potential adverse tax consequences to the employer, trust and participants, unless certain corrective actions are timely made. In addition, IRC §404(j) provides that employer contributions made that exceed the IRC §415 limits are not deductible.

For more detail with respect to the IRC §415 limitations, it is recommended that you consult with your local pension professional.