Sole prop deferrals plus catch-up exceeds limits

[Belgarath]

Say you have a sole prop with one employee. Sole prop's Schedule C is low enough so that taking into account the contribution for the employee, and the earned income reduction, the sole prop's net "plan" income is, say, $25,500. Sole prop is catch-up eligible, and deferred $26,000.

Now, under IRC 414(v)(2)(A)(ii) the sole prop deferral can't exceed $25,500. So I assume the excess $500 is considered a 415 violation? I don't see what else it could be - not a 402(g) violation nor an ADP failure...

[CuseFan]

Both? 401(k) contributions, including catch-up, are limited to the lesser of $26,000 or 100% of compensation (similar to 415), which in this case is $25,500, correct?. Regardless, the $500 must be distributed for correction.

[Lou S.]

When was it deposited? Is it a pooled account or individual?

If deposited in 2021, why not call the $500 a 2021 contribution?

If pooled, don't you have a $500 profit sharing contribution? You say "after taking into account the contribution for employee", why not use that $500 to fund the first $500 of the employer contribution for the employee contributions?

And then you have last resort - §415 excess refund.

[Belgarath]

Hi Lou - nice idea, but it was all deposited in 2020.