Deducted Contribution in 2018 / Never Funded

[austin3515]

Employer A deducts a $10,000 profit sharing contribution on his 2018 1120.  The contribution was inadvertently never deposited, and is just being discovered now.

Is there any way to "Cure" the deduction or is the only option to amend 2018 to remove the deduction and pay the new taxes?

[Belgarath]

No way to cure it that I know of. If there is, I'd love to hear about it!

[Lou S.]

Amend the return.

 

[Larry Starr]

4 hours ago, austin3515 said:

Employer A deducts a $10,000 profit sharing contribution on his 2018 1120.  The contribution was inadvertently never deposited, and is just being discovered now.

Is there any way to "Cure" the deduction or is the only option to amend 2018 to remove the deduction and pay the new taxes?

Well, the 2018 valuation, if it reflects a $10k contribution that was never made also needs to be redone.  And the tax return need to be amended to reflect the actual situation (they took a $10k deduction that they were not entitled to).  That's the correction.

[ESOP Guy]

48 minutes ago, Larry Starr said:

Well, the 2018 valuation, if it reflects a $10k contribution that was never made also needs to be redone.  And the tax return need to be amended to reflect the actual situation (they took a $10k deduction that they were not entitled to).  That's the correction.

Can they redo the 2018 valuation?    It is my understanding that they can't deduct it but that doesn't mean it isn't a plan asset and the participants don't have a right to the money to be in their balance.   This is one of those times you have to ask when did this receivable become a legal plan asset? 

It has been a while I have had this but I recall they had to deposit the money in the year we were in.  There are rules about how this will be a current Annual Addition in the 415 regulations.   

But it isn't clear to me just becasue they can't deduct the contribution they don't still owe the contribution to those participants.   The place this could make a big difference is if someone worked in 2018 and is no longer working aren't they entitled to their allocation?   And I am thinking this is where you run into some crazy 415 issues.   That person has a current Annual Addition but no compensation.  I forget how we handled all of that.  

[austin3515]

Fortunately for me this is a solo 401k.  But contributions are discretionary so my understanding on the matter is even if declared a contribution it is not irrevocable even if participants lose out.  I had a plan once many years ago where profit sharing was allocated and participant statements were distributed.  Plan sponsor fell on hard times and had no money and the ERISA attorney we consulted said no problem to take it away because it is discretionary.  PR nightmare notwithstanding.

[Luke Bailey]

I think it depends on whether there was some sort of legal action, e.g. board minutes, declaring the contribution. If there were, then I think you'd have to make it, allocate for the year it was intended to hit, and deduct in next after making it, since the contribution deadline missed for current deduction. Here, since it's a solo 401(k), likely very informal. If all there was was an informal indication, e.g. a phone call to you, Austin 3515, that he or she was going to contribute the 10 grand, it probably is not irrevocable.

[austin3515]

If something doesn't say it is irrevocable, then it is revocable.  That's why certain legal documents include the word irrevocable in the first place.  The document says it is discretionary.  The document is not amended to make it mandatory merely because someone makes a decision to exercise their discretion a certain way even if that decision was made in a Board Resolution.

That's how I see it anyway!

[Larry Starr]

2 hours ago, ESOP Guy said:

Can they redo the 2018 valuation?    It is my understanding that they can't deduct it but that doesn't mean it isn't a plan asset and the participants don't have a right to the money to be in their balance.   This is one of those times you have to ask when did this receivable become a legal plan asset? NEVER.

It has been a while I have had this but I recall they had to deposit the money in the year we were in.  There are rules about how this will be a current Annual Addition in the 415 regulations.   IT NEVER WAS.

But it isn't clear to me just because they can't deduct the contribution they don't still owe the contribution to those participants.   THEY DON'T OWE IT. 

The place this could make a big difference is if someone worked in 2018 and is no longer working aren't they entitled to their allocation?  NO 

And I am thinking this is where you run into some crazy 415 issues.   That person has a current Annual Addition but no compensation.  I forget how we handled all of that. ALL NON ISSUES.  

See my response in CAPS above.

[Larry Starr]

17 minutes ago, austin3515 said:

If something doesn't say it is irrevocable, then it is revocable.  That's why certain legal documents include the word irrevocable in the first place.  The document says it is discretionary.  The document is not amended to make it mandatory merely because someone makes a decision to exercise their discretion a certain way even if that decision was made in a Board Resolution.

That's how I see it anyway!

Agreed.

[austin3515]

No need to yell at ESOP guy! 

[Larry Starr]

25 minutes ago, austin3515 said:

No need to yell at ESOP guy! 

To quote one of my favorites; "Sometimes a cigar is just a cigar". Sometimes caps are just caps!

[austin3515]

And while an impeachment trial is underway!  Well played, well played!

[Belgarath]

Carefully avoiding any indication of taking one side or the other, (as emotions run high) this is anything but a "trial" - it is merely a farce. The only good thing about it is that while Congress is wasting taxpayer dollars, they are not engaged in wasting far more taxpayer dollars on a plethora of bad ideas.

[david rigby]

5 hours ago, Belgarath said:

... they are not engaged in wasting far more taxpayer dollars on a plethora of bad ideas.

You mean, like "pension simplification"?