Improper 2012 401k Contribution for LLC

[Gadgetfreak]

LLC member made a $17,000 401k deferral on 12/27/12 to TD Ameritrade. Their CPA is telling him today (9/11/13) that he earned NO schedule C income in 2012 and therefore there was no way he could have deferred money into the 401k Plan. Is there any IRS guidance on how to handle this? We are asking Relius about our options and will need to call TD Ameritrade but the CPA is saying that there "must" be IRS guidance on what to do. Thx.

[ETA Consulting LLC]

It is a 415 violation since his 415 limit is zero. You may correct now under the current plan terms; no big deal.

Good Luck!

[QDROphile]

You can't correct under plan terms. Plan terms can only prevent a 415 violation. Once the excess has been deliverd to the plan a violation ocurs. You can correct under plan terms if the plan provides that if the annual addtion limit is exceeded notwithstanding the provisions designed to prevent the violation, the violation will be corrected under EPCRS.

[BG5150]

...the violation will be corrected under EPCRS.

Which pretty much says the deferrals have to be distributed with earnings.

Can this be done under SCP? This is from the EPCRS definitions of an "egregious" failure (which has to be corrected under VCP):

© a defined contribution plan where a contribution is made on behalf of a highly compensated employee that is several times greater than the dollar limit set forth in § 415©.

(emphasis mine)

The member made a deferral that was infinitely larger than the dollar limit. $17,000 / $0.

[Kevin C]

The Participant did not exceed the 415 dollar limit, he exceeded the 415 100% of pay limit. Given the serious nature of the examples of egregious failures, I doubt a failure caused by an incorrect estimate of compensation would cause this to be considered egregious.

There may still be a problem with eligibility for SCP. Rev. Proc. 2013-12 added a clarification to Section 4.04.

... A plan that provides for elective deferrals and nonelective employer contributions that are not matching contributions is not treated as failing to have established practices and procedures to prevent the occurrence of a §415© violation in the case of a plan under which excess annual additions under §415© are regularly corrected by return of elective deferrals to the affected employee within two and one-half months after the end of the plan's limitation year. ...

To me, it isn't clear cut whether SCP would apply. I would present the options and let the client decide between SCP and VCP.