How does the IRS "disallow" the deduction?

[Bri]

My client's 401(k) profit sharing plan document (I believe it's Sungard Corbel-generated) says that contribtuions may be conditioned upon deductibility. And "to the extent any such deduction is disallowed....whether by agreement with the Internal Revenue Service or by final decision of a court...." the Employer could get the money back within one year.

My question is, what constitutes "agreement" with the IRS?

Here's the backstory - small doctor's office, and they advance-fund their profit sharing throughout the year and true up the rest after 12/31.

Last spring they adopted a DB plan for 2014 to get a huge deduction. But as a non-PBGC plan, that capped DC contributions to 6%. Which they easily exceeded by December. (And they were pretty close to the actual 6% number in the DC plan by the time the first DB deposit was made last June.)

Does 404 basically constitute "agreement" by the IRS that the excess amounts are not deductible?

Or is this something that requires a written edict formally disallowing the deduction?

thanks....

-bri

[Lou S.]

This why you don't pre-fund the defined contribution plan and or SEP. What you have is non-deductible contributions to the defined contribution plan subject to the excise tax. Good luck.

[My 2 cents]

There is (or at least was) a limited mechanism in defined benefit plans where the enrolled actuary can certify that the amount is in excess of the deduction limit, permitting that clause to be invoked. Not sure if it still applies.

In any event, I think that one can apply for a private letter ruling as to whether the contribution is deductible. If they say "no", then the clause applies. Ditto for an IRS audit that finds the contribution not to be deductible. Not pretty, but at least the clause is there allowing a partial fix.

[Mike Preston]

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