Excise Tax for Nondeductible (Excess) Contributions

[Purplemandinga]

A plan made a profit sharing contribution to the 2017 calendar year plan that utilized incorrect compensation during nondiscrimination testing. Lets say this contribution was 50,000. When the nondiscrimination was corrected, the correct allocation should have been 10,000. So 40,000 was forfeited for use in future years.

The problem here was the tax deductible contribution threshold for 404 lowered to 40,000 from its original amount of 160,000.

Is there a way to avoid paying excise taxes on form 5330 for 10,000 of contributions that were over and above the 404 limit? 

[ESOP Guy]

Maybe it is me but I find this question confusing. 

The 404 limit is 25% of eligible gross compensation. 

You can have a different definition of compensation for testing and allocations that are well below gross compensation and still deduct 25% of gross compensation of the eligible participants. 

It isn't clear to me why a change in compensation for testing lowered the 404 limit. 

But to answer you questions directly if it is true you have a non-deductible contribution there is no getting out of the excise tax that I have ever heard of.  If they are filing late there is no getting out of the interest on the late tax.  If the IRS assess a late penalty you can sometimes get the IRS to waive that part if you can show cause and there isn't a pattern of being late.  You write a letter to the IRS after they send the penalty letter to your client asking for a waiver.  It has been a while since I wrote one of those letters but I think the IRS notice even tells you how to ask for the waiver.  

[Purplemandinga]

I'm sorry I should have been more clear. The effective date of the plan was 11/1/2017 and the individual who tested used full calendar year compensation. This is what caused the reduction in compensation available to allocation on.

[C. B. Zeller]

The 404 is limit is 25% of compensation paid during the tax year. So unless the sponsor also had a short tax year from 11/1 to 12/31 then there is no problem.

[Purplemandinga]

Good to know. Thank you!

[Larry Starr]

14 hours ago, Purplemandinga said:

I'm sorry I should have been more clear. The effective date of the plan was 11/1/2017 and the individual who tested used full calendar year compensation. This is what caused the reduction in compensation available to allocation on.

Did the plan actually say to only use comp from the effective date; it is quite likely that it did not. If it did not, then you also have a serious problem with your "forfeiture".  Is there a professional administration firm handling this plan?