Self employed deposits too much into 401k...Any suggestions for the excess

[jkharvey]

Self-employed individual with a 401k/PS plan has a net schedule C  for 2016 (before 1/2 SE tax and before his PS contribution) of 100,000.  The 404 deductible contribution is 18587 (provided I did that math correctly).  He can contribute the 18587 for PS and then max out the deferrals, 24000.  The total deductible contribution becomes 42587.    The individual, however, made a contribution in excess of this amount.  Any suggestions on how to remove that excess?  could it be returned and considered a reversion subject to 4980 excise tax?  I understand about the excise tax for nondeductible and "using" up that amount in subsequent years, but there may not be compensation in 2017, so we are looking at how to remove it from the account, if possible.  

[Mike Preston]

As a practical matter, I think the plan sponsor has little choice but to consider the amount deposited in excess of 42587 as a mistake in fact and return it.  Of course, this is based on the plan document having mistake in fact language. The other path to go down is to see whether the accoountant has some questionable deductions in the determination of the $100,000 and see whether it might not be reasonable to increase that amount.  Of course, you didn't indicate how much in excess of 42587 was deposited, so we don't know the magnitude of the problem.

Yet another example of clients that contribute for themselves before the end of the year getting themselves in trouble.  It seems I see it more and more frequently and the root cause seems to be a financial advisor, paid via comission, a bit too eager for the client's good to see onies deposited into the plan.

[spiritrider]

What are the circumstances involved in the making of the excess employer contribution. The IRS has suggested that only things like arithmetical or clerical errors constitute a mistake of fact for returning excess employer contributions.

I don't think what a dumb client presumed or assumed matters. Just because their employer contribution exceeds the deductible limit, I do not believe that makes it a mistake of fact.

[ESOP Guy]

So far I am not seeing a mistake of fact.

You don' t actually say what year he deposited the money.  It is assumed in some of the answers it was before 2017.  If in fact it was deposited in 2017 but before the calculations then you can at least delay the problem for a year.  Part would be a 2016 contribution and any amount above that is a 2017 contribution. 

That is of limited use if there isn't going to be 2017 income obviously. 

[ETA Consulting LLC]

On 8/3/2017 at 3:20 PM, Mike Preston said:

As a practical matter, I think the plan sponsor has little choice but to consider the amount deposited in excess of 42587 as a mistake in fact and return it.  Of course, this is based on the plan document having mistake in fact language. The other path to go down is to see whether the accoountant has some questionable deductions in the determination of the $100,000 and see whether it might not be reasonable to increase that amount.  Of course, you didn't indicate how much in excess of 42587 was deposited, so we don't know the magnitude of the problem.

Yet another example of clients that contribute for themselves before the end of the year getting themselves in trouble.  It seems I see it more and more frequently and the root cause seems to be a financial advisor, paid via comission, a bit too eager for the client's good to see onies deposited into the plan.

One more.  If the deposit was actually made in 2017 (after the 2016 year), then why not use the excess as a contribution funded for 2017?  Wouldn't that work as well?

Good Luck!