415 Excess Contribution with Employee Deferrals

[TPA Bob]

in 2015 employee (and owner)  defers 18,000 and the company matches 6,000.  In March of 2016 CPA calculates, has the Company contribute, and deducts on the 2015 return 37,500.  The total allocated to employee is 61,500.  415 limit is 53,000 (under age 50).  i am treating the full 37,500 contributed in 2016 but allocated and tax deducted in 2015 as a 2015 annual addition.

Plan uses Oppenheimer document, which says if there is an excess allocation must correct using EPCRS.

EPCRS provides if excess allocations are attributable to elective deferrals must be distributed.

Client and broker want to take the position that the excess allocation was only due to the 2016 contribution allocated to 2015 (employer monies) and that no deferrals should be distributed.  My remembrance from technical readings is timing of the contribution does not matter, but only if a contribution was credited to a limitation year.

Any thoughts would be appreciated.

[Lou S.]

Your analysis seems correct.

I thought the IRS had a pronouncement that you no longer needed to go though VCP to correct the excess annual addition you could simply self correct by refund, similar to ADP or 402(g) excess.

 

[TPA Bob]

we are going to self correct

 

 

[Mike Preston]

What we have here is a failure to communicate......

The accountant needs to be told that it is never wise to finalize the contribution amount before a qualified plan expert weighs in.

Isn't this just a case of the accountant recognizing the wrong amount for the 2015 deduction?

[TPA Bob]

As Paul Harvey would say, now the rest of the story.

In addition to the above 415 issue they exceeded their 404 deduction limit by 6,719.95.  I believe these are two separate issues (404 and 415) and still advise the 8,500 be distributed.  The amount of contribution in excess of the tax deduction amount will be suspended and used towards the 2016 contribution.  Advised the Company amend its 2015 tax return and file an excise tax return for the excess contribution.

I do not see a way out of distributing the 8,500 or suspending the 6,719.95.  Anyone have any thoughts of how to possibly net the two?

[RatherBeGolfing]

$37,500 contributed in 2016, why not simply amend the 2015 return to be within both limits and count the remainder as a current year contribution deducted in 2016?

Why insist on calling it a 2015 annual addition or excess?

[ETA Consulting LLC]

9 hours ago, RatherBeGolfing said:

$37,500 contributed in 2016, why not simply amend the 2015 return to be within both limits and count the remainder as a current year contribution deducted in 2016?

Why insist on calling it a 2015 annual addition or excess?

Thank you!  I was wondering why this wasn't the first approach :-)

[TPA Bob]

My understanding was that once contributed in 2016 and deducted in 2015 that established the year credited (2015).  If as easy as amending the Plan Sponsor's tax return would gladly do that. Are you saying as long as contributions are made after the tax and limitation year you would never have a 415 issue? 

Would you amend and reduce employer contribution by 8,500? 

[RatherBeGolfing]

45 minutes ago, TPA Bob said:

My understanding was that once contributed in 2016 and deducted in 2015 that established the year credited (2015).  If as easy as amending the Plan Sponsor's tax return would gladly do that. Are you saying as long as contributions are made after the tax and limitation year you would never have a 415 issue? 

Would you amend and reduce employer contribution by 8,500? 

Yep.

It really shouldn't be more complicated than that.  The fact that the CPA made a mistake on the sponsor's return doesn't taint the contributions, the return just has to be amended to show the correct contribution.  

[Mike Preston]

There *IS* a school of thought that once a contribution is designated "on account" of a particular tax year (as would be the case if the check or authorization were designated as a contribution for a particular tax year) that it can't be changed.  I think the IRS also takes the position that even in the absence of a specific designation the act of deducting it on a tax return designates the contribution for that tax year.

With that said, when an act of designation would violate the 415 limit it is arguable that such designation, having never been allowable, is valid in the first place.

I *CAN* tell you that every accountant I've spoken with on this issue does not hesitate to amend the offending tax return and treat the excess as a contribution for the next fiscal year.

 

[imchipbrown]

The title of this thread seems to be the proper place to pose my question.

Safe Harbor 4% Match 401(k) Plan with Integrated Profit-Sharing.  Owner (over 60, HCE) with 5 other employees (one is HCE).  In 2016, Owner maxes 401(k) at $24K, matches $8K and contributes to PS, resulting in his PS allocation being $33,000 per the Plan formula or $6k over 415(c) limit.

I'm reading Notice 2016-60, which says (emphasis mine):

• (2) Correction of Excess Allocations. In general, an Excess Allocation is corrected in accordance with the Reduction of Account Balance Correction Method set forth in this paragraph. Under this method, the account balance of an employee who received an Excess Allocation is reduced by the Excess Allocation (adjusted for Earnings). If the Excess Allocation would have been allocated to other employees in the year of the failure had the failure not occurred, then that amount (adjusted for Earnings) is reallocated to those employees in accordance with the plan’s allocation formula. If the improperly allocated amount would not have been allocated to other employees absent the failure, that amount (adjusted for Earnings) is placed in a separate account that is not allocated on behalf of any participant or beneficiary (an unallocated account) established for the purpose of holding Excess Allocations, adjusted for Earnings, to be used to reduce employer contributions (other than elective deferrals) in the current year or succeeding year.  While such amounts remain in the unallocated account, the employer is not permitted to make contributions to the plan other than elective deferrals.

Can I calculate 2017 max PS to get owner to $60K (401k, Match and PS) using up the 2016 $6K overage plus whatever else needed?