415(c) and Amended Tax Returns

[Cephas]

Client came to us with a solo 401(k). The client's annual additions to the 401(k) were, in reality, less than the maximum 415(c) limit for years 2019-2023. Unfortunately, the client understated his income on his federal income tax returns during those years. The client's new accountant is planning to file amended returns for those years to accurately report the client's income. Without the amended returns, the client "appears" to have exceeded the limitation in 415(c)(1)(B) (i.e., 100 percent of the participant's compensation) due to the understated amounts on his original tax returns. With the amended returns (which, again, accurately reflect the client's income during the years in question), the client was below the 415(c) limit each year. 

Can this issue be resolved by filing amended returns, or does the client need to use EPCRS to address anything? Because the client did not exceed the 415(c) limit in any year (after giving effect to the amended returns), my initial impression is that there is no need to distribute any excess annual additions. Am I thinking about this correctly? Happy to consider any other issues you may see.

Thank you for your time.

[Lou S.]

It doesn't sound like the plan needs to do anything. There are no other participants who may have gotten the wrong allocation percentage and you state the allocations are under the 415 limit so there is no 415 limit violation to correct. Probably want documentation in your files that the income supports the 415 limits. Assuming everything was reported correctly on the 5500-EZ what is there to correct?

If they contributed more than 25% deductible limit in any years that's an issue for the accountant to address with the tax returns they are fixing and any 5330s that might be due for non-deductible contributions. If they wind up with a non-deductible carry forward, they should probably let you know so you can advise them properly going forward.

 

[Cephas]

Thanks, Lou S - very helpful.