ADP Refunds for Partners

[bzorc]

Just received financial statements for a partnership with 2 partners. Based on the income of the company and the split to the partners, the plan fails ADP testing (no match), and both partners will need to receive substantial refunds for their 2018 contributions.

Question is are the refunds subject to the Form 5330 tax for failing to make the refunds before March 15.

I looked through the messages here and couldn't find any previous guidance. Any replies would be appreciated, thanks.

 

[justanotheradmin]

Yes, the §4979 excise tax applies to excess contributions (and excess aggregate contributions, but sounds like they don't have any of those). 

Here is the cite to the 2 1/2 month deadline (March 15). 

https://www.law.cornell.edu/uscode/text/26/4979

I've never heard of an exception for partnerships. This assumes of course refunds are actually done, and they they don't simply deduct less as deferrals. 

[Tom Poje]

or QNECs are made

[Luke Bailey]

LIke justanotheradmin, I don't recall (although have not checked) there being a different rule for partners in partnerships than for W-2 employees. I guess the question arises because, since the K-1's are not due until 4/15, there would be a temptation to just treat the excess as a reduced contribution, which from the point of view of the partner's 1040 and and K-1, would be doable. But it seems to me that if the partner did elect (as required) by last day of plan year to contribute a certain amount, and that amount went into the plan and is now being distributed (after 3/15), it would have to be treated like any other excess contribution.

Query what would happen if, however, the contribution had not yet actually been made (since the partner generally has until 4/15 to make it)? In that case, it would seem there is no distribution of excess contribution, so excise tax at least arguably would not apply, although I'm not sure how IRS would feel. But again, have not researched. If your plan had a provision permitting the plan administrator to reduce contributions as it seems fit in uniform and nondiscriminatory manner, maybe this would fit that and you would be OK if money had not actually gone in and was not being returned.