404 Tax Deductibility

[Catch22PGM]

Two semi-related questions and I'm hoping someone out here can help.

Question #1 - a large plan fails ADP testing every year and dozens of HCEs take refunds.  In 2019 there was a matching contribution made every pay period.  Some of the match attributable to the refunded deferrals had to be forfeited.  My question - is the amount of match that was forfeited still a deductible contribution and do we count it towards the 25% deduction limit?

Question #2 - assume an employer calculates and deposits a match equal to 10% up to 100% of deferrals every pay period throughout 2019.  A mistake is made by payroll and too much match was deposited for one participant in 2019 - instead of receiving $1,000 match on $10,000 of deferrals she received $1,500 match.  The error is caught after the end of the year - January of 2020.  The excess $500 that was deposited is transferred-out of the participant's account and into the plan's forfeiture account which was then used to pay administrative fees.  Is this excess match tax-deductible for the employer in either 2019 or 2020? 

[Luke Bailey]

Catch22PGM, I don't recall seeing any guidance or case specifically on point (if there is any, I'm sure someone will correct me), but it seems to me that since the amount did go into the trust, irrevocably, then in the case of both #1 and #2, the amount is deductible if within the 404 limit. And of course, the #1 amount would count towards the limit.

[Bird]

#1 definitely a contribution.

#2 I would call it a contribution...but moving it to the forfeiture account does not make it a forfeiture, eligible to pay expenses.  The right thing to do is allocate it as an additional contribution, to all participants, according to the terms of the plan, preferably as additional match.  If the match is fixed then it would be profit sharing.  If the plan doesn't allow PS...mmm.  Is it tempting to use it to pay fees and can you get away with it?  Definitely/probably.  

[Catch22PGM]

Thank you both.  I came to the same conclusions but having others voice their opinions sure makes me feel better about it.