Employer has exceeded 15% deductibility limit.

[Guest Sara H]

I have an employer who has exceeded the 15% employer deductibility limit by $6,000 for their 2000 plan year (it's a calendar year). I know that the employer is supposed to file a form 5330 to pay the 10% excise tax. Am I correct in saying that they also need to amend their 2000 tax return to reduce the amount deducted by $6,000?

Also, what if the employer says that they don't want to file the 5330 and just reduce contributions for the next year? What could the ramifications of that be? Is there a dollar amount that upon audit, the IRS would say that the excess is immaterial? Any information would be helpful:-)

[rcline46]

If no one exceeded the 25%/30k limit the PLAN is ok. You can state that based on the information you received, it would appear the contributions exceed 15% of the pay given to you. Deductions are the client/CPA problem, not a TPA problem.

If you ARE the CPA, file the 5330. FIx the 1120. The IRS takes the position that only they can declare money non-decutible and therefore refundable from the plan. Deduct it next year.

If the funds actually went in after plan year end, you have more options, like no 5330 due, only amend the return. Allocations would have to be fixed.

Are we having fun yet?

[Guest]

mr cline-

I know you can allocate the contribution in 2000. I also know you can deduct the contribution in either 2000 or 2001 [depending on when it was made] Assuming the contribution (or at least some of it) was made in 2001, are they allowed to deduct 15% in 2000 and the rest in 2001 without having a problem?

Of course it would count against them in 2001, but maybe the contribution will be less that year.

[rcline46]

I am not an accountant, but most of this 'stuff' is under 404. This is not the fact pattern given in the usual examples which permit you to deposit up to 30 days after tax deadline to contribute for prior year and deduct this year.

ASSUMING the amount over 15% was actually contributed after plan year end, and taking a leap of faith from the above, I think you can split it even if deposited in one day. And yes it does count against the next year 15%. And no 5330 is due because AS OF THE END OF THE YEAR there was not any non-deductible money in the plan.

[Guest JAREL]

If the contribution is made in 2001 before the tax return due date, plus extensions, and is attributable to 2000, the contribution is deemed to be made on 12/31/2000 and therefore the tax is owed. Accordingly, the excess can't be allocated to participants for 2000. If allocated on 2001 pay, you haven't exceeded the limit under 404.

[Guest]

not necessarily true.

as stated earlier, an employer can allocate a contribution for the prior year even thouh it is made in the current (within 30 days after the 404(a)(6) deadline.

for deduction purposes the employer has two choices.

1. Deduct the contribution in the prior year (as long as it is made by tax filing time. this relies on Rev Ruling 76-28 which says treat contribution as being made on the last day of the prior year.

but the empployer doesn't have to exercise this option. (maybe????)

2.he can deduct it in the year the contribution was made - or at least it appears this may be an option. The ERISA Outline Book has a discussion on this. (see page 7.315 of the 2001 edition)

so this raised the question:suppose employer made a 10,000 contribution for plan year end 1999.

the 15% limit for 1999 was only 7500.

so, does employer deduct 7500 for 1999 and 'save' 2500 to be deducted in 2000 (along with whatever other contributions may be made) based on the above comments it seems like that might be possible.On the other hand, it could very well be the document states that contributions will be deemed to have been made as of the last day of the plan year. now that I think about it, I seem to recall seeing that in a few documents. and of course the document would decide in that case(?)

[AndyH]

Let's also not forget that a deduction to some ps plans in excess of 15% if perfectly acceptable if they had a carry-forward (pre-84 I think off-hand) balance available (i.e. the plan existed then and they didn't always put in 15%).

This is often overlooked.

[Guest Greg Morrison]

Great point, AndyH with one clarification. The unused limitation carry forward year is pre-87.