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exceeded maximum employer contribution?

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pkeefer	exceeded maximum employer contribution?	Lead	[-]
Posts: 1 (03/08/08 13:16:12) Reply Quote More My Recent Posts Message Me Connection Blocking Invite Ignore User's Posts	Looking at the IRS article at http://www.irs.gov/retirement/article/0,,id=119625,00.html, it would be easy to assume that the rule that limits the employer's contribution to 25% of the employee's salary no longer exists. The 25% limit is not mentioned here. So if an employer exceeded that amount for the 2007 contribution, what would be the best way to rectify the situation? Would it be acceptable to only declare the 25% amount on 2007 taxes, and then reduce the 2008 contribution by the overage? Or is some more complex action required? Thank you! Last Edited By: pkeefer 03/08/08 13:20:25. Edited 1 time.
DCK101	Excess Employer Contribution	#1	[-]
Posts: 345 (03/09/08 07:41:51) Elite Member Reply Quote More My Recent Posts Message Me Connection Blocking Invite Ignore User's Posts	What kind of plan is this? Is there only one participant? When were the excess contributions made, before or after the plan year end? Is the plan year coincident with the employer's fiscal year? What compensation was used for the calculation? Is it an incorporated business? Was any other limit exceeded (402g, 415) or just 404a? This is all information that goes into determining whether in fact, a nondeductible employer contribution was made to a plan. You should have a qualified professional review the situation to make the proper determination prior to taking action. Generally, any nondeductible contribution must be removed from the participant's account, and held in suspense under the plan until it may be allocated and reported, in a future year as a deductible contribution. The employer must also pay a 10% federal excise tax on the amount. Only the deductible portion of contributions may be reported on the employer's tax return.
pkeefer	exceeded maximum employer contribution?	#2	[-]
Posts: 2 (03/11/08 04:11:34) Reply Quote More My Recent Posts Message Me Connection Blocking Invite Ignore User's Posts	It is a 401(k) with only one participant, but it is not a "Single K" plan. It is a regular 401(k). The "excess contributions" were made before the end of the fiscal year, which is the same as the plan year. W-2 salary of the employee was used as the basis for determining that it was over 25%. No other limit was exceeded. However, does the 25% limit still exist? The IRS article definitely does not mention this limit along with all the others. Since it is already the "future year", is it necessary to remove the excess amount and put it back in?
pkeefer	exceeded maximum employer contribution?	#3	[-]
Posts: 3 (03/11/08 04:19:26) Reply Quote More My Recent Posts Message Me Connection Blocking Invite Ignore User's Posts	Also, this is an S-Corporation. Thank you!
DCK101	Excess Employer Contribution	#4	[-]
Posts: 348 (03/11/08 18:25:51) Elite Member Reply Quote More My Recent Posts Message Me Connection Blocking Invite Ignore User's Posts	Yes, the 25% limit still applies, but only to non-salary deferral, employer contributions. As an example: W-2 income = $100,000 Employee salary deferral contributions = $15,000 or 15% of compensation Employer profit sharing contribution = $20,000 or 20% of compensation Total contributions = $35,000 or 35% of compensation This is ok, because employer contributions did not exceed 25% of eligible compensation. If the employer contributions did exceed 25% of compensation, the excess is a nondeductible contribution. The employer must file Form 5330 and pay the 10% excise tax. Since there is only one participant and it is now "the next year", the amount need not be removed. The records of the plan and the employer's tax returns must be adjusted however, to reflect the correct contribution amounts attributable to each year.

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