Combined Plan Deduction Limit

[perkinsran]

Client makes profit sharing deposits during the year and also has a Cash Balance Plan.  In 2019, the profit sharing contribution deposited into the plan was greater than was deductible for combined plan purposes  (e.g. profit sharing exceeded 6% due to it being a service company).

Since the owner’s portion is not deductible and is below the 415 limit, can the money stay in his account and be treated as after tax basis for taxation purposes.

[Mike Preston]

Yet another problem created by plan sponsors contributing before the end of the year. 

[justanotheradmin]

Why do you think owner's portion would be after-tax? What kind of entity is it? A sole proprietor?

The inability to deduct the contribution (and the associated excise tax) is on the employer, not the individual employee. 

If I'm an employee and my employer exceeded the deductible limit in contributions - it doesn't change the tax status of the employer contributions made to my individual account, they would still be pre-tax. Maybe there is some special rule for self-employed individuals, but if there is I'm not aware of it. But admittedly, employers contributing too much isn't an issue I've had lately. 

[CuseFan]

Contributing more than 6% PS means the 31% combined limit applies - it does not mean that if your total DB/DC was more than 31% that just the excess of PS above 6% is not deductible, whatever exceeds 31% of eligible payroll is not deductible. 

[Mike Preston]

3 hours ago, CuseFan said:

Contributing more than 6% PS means the 31% combined limit applies - it does not mean that if your total DB/DC was more than 31% that just the excess of PS above 6% is not deductible, whatever exceeds 31% of eligible payroll is not deductible. 

Not exact, but should definitely get one headed in the right direction.  There is no 31% rule.  It is a shortcut rule that usually, but not always, works.  In this case the 31% (or the actual limit) is increased to no less than $X where X is the greater of the amount that satisfiies minimum funding or the excess, if any, of the plan's funding target  over the value of the plan's assets. 

[CuseFan]

Yes, sorry, I was over-simplifying.