Deductibility of Contribution Made in Error

[Dennis Povloski]

Profit Sharing Plan has a last day rule for allocations.

Employer wanted to make a flat 3% contribution to all employees, so he plugged a formula into payroll and contributed 3% to each participant every pay period (so that he wouldn't get a large lump sum contribution due at the end of the year).

A participant terminated during the year, and therefore didn't meet the allocation requirement to receive the profit sharing contribution.  The profit sharing was paid out with his distribution.

The employer was not able to recover the excess distribution, so he will make a contribution to put the plan back in the place that it would have been, had the error not occurred.  As I understand it, the employer can deduct the corrective contribution in the year that it is made.

My question:  Is the original contribution made to the employee that didn't meet the allocation requirements deductible?

It seems to me that it's kind of double dipping if he deducts the contribution to the participant and also deducts the corrective contribution.

Thanks all!

[BG5150]

Was this for 2017?  Could you do an 11-g amendment giving this person a benefit?

[Bird]

It's deductible; the money was contributed to the plan but wasn't allocated quite right.

[Luke Bailey]

Right. There is nothing in Section 404 of the Code that says it had to be perfectly calculated and eligible for rollover when distributed to be deductible. Just has to be contributed to plan within the aggregate comp limits specified in Section 404.