Employer over-deposited PS to holding account--now what

In 2020, ER deposited $100,000 to a holding account in the plan (I know!).

Maxing out the owner and giving 5% to the EEs results in a $70,000 allocation for 2020 and passing of tests.

Does he have to allocate the remainder to the participants?  Or can he take back the funds as a Mistake of Fact?

Mistake of fact is usually a minor typographical or arithmetic error. If they meant to put in $10,000 and but typed an extra zero by accident, that would be one thing. But I would have a hard time believing they didn't notice $90,000 missing for over 8 months!

Check the plan document. I bet it says that the contributions will be allocated to participants.

Not a mistake in fact

I figured.  Just grasping...

Here is a question, if they only took deduction for 70k and pay excise tax on 30k, would the 30k be applicable for 2021? Given the allocation above, 70k is not the 25% deduction limit i.e. there was more room for deductions.

I am not sure I agree with my own statement though.

Any thoughts?

I agree with the statements above, that it isn't a mistake of fact. Given that, there's no excise tax (assuming the entire 30k falls within the 404 limit) and the 30 k must be allocated for 2020.

No deduction yet.  For 2020.  Taxes not filed.

3 hours ago, Jakyasar said:

Here is a question, if they only took deduction for 70k and pay excise tax on 30k, would the 30k be applicable for 2021? Given the allocation above, 70k is not the 25% deduction limit i.e. there was more room for deductions.

I am not sure I agree with my own statement though.

Any thoughts?

I am doing this from memory of the deduction/excise tax rules but as a general rule failing to take a deduction you could is NOT the same thing as something is not deductible. 

As such before I would go down this route someone would have to give me a clear cite that not taking a deduction and paying the excise tax allows you to time the allocation like this.  

14 minutes ago, ESOP Guy said:

I am doing this from memory of the deduction/excise tax rules but as a general rule failing to take a deduction you could is NOT the same thing as something is not deductible. 

As such before I would go down this route someone would have to give me a clear cite that not taking a deduction and paying the excise tax allows you to time the allocation like this.  

 

There is none.

3 hours ago, Jakyasar said:

Here is a question, if they only took deduction for 70k and pay excise tax on 30k, would the 30k be applicable for 2021? Given the allocation above, 70k is not the 25% deduction limit i.e. there was more room for deductions.

I am not sure I agree with my own statement though.

Any thoughts?

I agree with the other commenters that there is no way this is ok. The excise tax under IRC 4972 is on non-deductible contributions, defined as contributions made in excess of the limit under IRC 404. Choosing not to take a deduction for a contribution does not make it a nondeductible contribution, if it does not exceed the 404 limit.

Furthermore, even if you did actually make a nondeductible contribution, you still have to allocate it to the extent possible. You could carry forward an allocation if, for example, all participants were at their 415 limits.

Thank you and this is why I said I do not agree with my own statement. I was just curious if I missed something.

100% in agreement with CB and others. 30k extra for all rank&file, sure will be one pissed of plan sponsor.

21 hours ago, Jakyasar said:

sure will be one pissed of plan sponsor

As Forrest Gump and his mother say, "stupid is as stupid does", expensive lesson learned (hopefully) by the plan sponsor.