Excise Tax on Contributions exceeding 15% deduction limit.

[Guest SHP]

Can a contribution that is made after the end of the Plan Year and allocated for the prior Plan Year be deducted in the following year? (e.g. Company exceeded 15% deduction limit due to Salary Deferral, Matching funds, and Safe Harbor non-elective contribution allocated for the 2000 Plan year, but the last contribution was deposited in 2001. May the Company avoid the excise tax on non-deductible contributions by deducting the amount of the last contribution in 2001?)

[Guest SeanT]

Yes and No. Since the contributions have already been deposited, they cannot be withdrawn to avoid the penalty. The contributions were based on compensation earned in 2000, so the fact that it was funded in 2001 is of no consequence (IRC section 404(a)(6)). So, absent any loophole (an example of one is referenced below), I don't think your client can avoid the excise tax this year. (That's the "no".) However, the plan may deduct the excess amount in a succeeding taxable year (not plan year,,, in the event they are different) if the sum of the contributions and excess amounts do not exceed 15% of the compensation paid to participants in that succeeding taxable year (IRC section 404(a)(3)(A)(ii). (That's the "yes".)

If the plan has been in existence since 1986, your client may be able to take advantage of prior taxable years when the amount they deducted was <15% (with certain restrictions). If the plan is not that old, this loophole cannot be used to their benefit.

[M R Bernardin]

I disagree with the prior post. A contribution is deductible either for the fiscal year in which it is actually contributed, or for the prior fiscal year in accordance with the rules of 404 (i.e., must be contributed by due date of return for that year, must relate to compensation paid during that year, must be allocated during that year, etc.) I think you could avoid the excise tax.