Benefits, Rights and Features

We've got a SP dentist who sponsors  a  SHM 401K, he contributed for 2017 as well as 2018 in 2018 toward the employer match.

Of course the fund-holder directed the funds to the proper participant accounts.

Now that the employer has learned he contributed too much, he wants to either have the excess removed and a check cut back to him or to have the funds transferred to his own account.

We explained no-can-do, the money has already been deposited into the participants accounts and you can't remove it by claiming it was a contribution made in error.

As far as removing and re-depositing into his own account, we cited 401(a)(4) benefits, rights and features.

He wants to know why he can't contribute to his account now and to the employees' either later in the year, or by tax filing deadline for 2018.

Need a cite, please.

22 hours ago, thepensionmaven said:

Of course the fund-holder directed the funds to the proper participant accounts.

(You meant "the wrong" participant accounts rather than the "proper" participant accounts, yes?)

Actually, the accountant informed just now that she was referring to the elective deferral of the principal, shareholder of PC.

Apparently he contributed more than $18K during the year, the difference is the balance of the 2017 contribution, which was made Jan-March 2017.

Apparently the payroll company did not catch this.

I don't believe there is any way around a 1099R; but I believe if he were a sole prop, he could have until the due date of his tax return.

I think you should start over and give numbers and dates.  It doesn't sound like you have all of the facts.

I agree with the illustrious (you should see him in person!) Mr. Preston.

BUT, as an aside, I wonder about a dentist plan that is using a safe harbor match, since we have many dental office plans and every one of them is top heavy.  That means, a 3% top heavy minimum is required, and a 3% nonelective safe harbor contribution usually is much more economically effective for the practice than a match plan. 

Is this plan not top heavy? 

Just curious.....

We have always told clients that top heavy status is good! "If the plan isn't top heavy, it wasn't designed right!".  They, of course, tend to be general tested in most circumstances, but even if the demographics are bad, a design based safe harbor plan (max integration) with a 3% nonelective works very well in most circumstances.

All, just FWIW.

Larry.

Assuming there is reasonable compensation, how can a sole proprietor have excess deferral?

There is no W-2 to offset a 1099-R corrective distribution of a 402(g) excess. Wouldn't the SP just claim less as deferral, just the 18K on their taxes?

Wouldn't the extra just be reclassified as a mis-directed / over deposit?

I agree the money should not be removed from the plan, - under the principals of EPCRS once deposited to the trust, absent a specific distributable correction, it should remain in the trust, and be allocated. 

If the deposits all occurred in 2018, why can't the excess be counted as his personal deferral for 2018? Has he already made the maximum 2018 deferral deposit?

As to why making his match deposit before everyone else's - its a discrimination issue - he as the HCE would get the benefit of the investment gains / losses, he could count it if considered an allowable loan, etc. None the NHCE get the same benefit. 

If anything his match deposit should always be last because his  compensation as a SP isn't calculable until after year-end. If his employees receive W-2 based compensation, they could in theory receive the SH Match on a per paycheck basis, and then an annual true-up after year end. (I'm assuming the SHM is on a full year basis since he seems to be depositing things in large lump sums once a year). 

As to the TH issue - SH NEC is only more favorable if the dentist wants to use a PS to get a higher contribution. If they are satisfied with the SH Match (maybe its a 6%?) and possibly a layer discretionary match (such as an additional 4%), then no PS is needed. Maybe cross-testing doesn't work well, due to ages, comp, whatever. 

The doc we use (and I would guess many others are similar) provides that a SH MAtch contribution is deemed to satisfy the TH min as long as no other employer contributions are given. It does say an additional Match is also allowed if it is within the ACP SH 4%/6% rule. 

13 hours ago, justanotheradmin said:

Assuming there is reasonable compensation, how can a sole proprietor have excess deferral?

OP changed the "facts":

"Actually, the accountant informed just now that she was referring to the elective deferral of the principal, shareholder of PC."

thanks Bird. I did miss that. 

Does the P.C. shareholder receive a W-2? 

So the 2017 W-2 box 12 shows more than $18,000? (or 24k if over 50?)

- Ignoring the fact that the deposit was probably late if it didn't occur until 2018- 

the result is a simple - 402(g) excess. Corrective distribution for the excess, plus earnings, plus 1099-R. it gets paid out to the principal. The 1099-R taxable amount counteracts the excess in box 12 on the W-2. Earnings probably taxed current year. 

Probably needs to happen ASAP (April 15) though to avoid double taxation.