Solo K & Profit Sharing excess contribution
Hello,
A client put $25K as profit sharing thinking his W2 was $100,000. However, it turned out that it was $85,000
The profit sharing contribution was made IN 2020.
is there a way we can count partial contribution for 2021?
What’s the best way to correct it?
Client’s CPA told me that amending W2 is possible but it’s costly.
Thank you!
Permalink Submitted by William Tuttle on Thu, 2021-09-02 01:12
$85,000 * 25% = $21,250 was a legitimate employer contribution. That amount was the correct deduction on the 2020 tax return. Only $3,750 was an excess contribution.
Excess non-elective (AKA profit sharing) employer contributions made during the tax year can not normally be returned. They are a 401k plan error and should be corrected under the IRS Employee Plans Compliance Resolution System (EPCRS).
This excess employer contribution is considered a non-deductible contribution. The 2020 tax return should be amended to reflect the correct deduction. This excess employer contribution requires submission of Form 5330 and is subject to a 10% excise tax until reconciled with future available employer contribution space and an additional Form 5330 for the subsequent year.
There is no statute of limitations for failure to file Form 5330. The excise taxes and penalties will accrue each year until resolved.
Refer to IRS Publication 560 and the IRS 401k fix it guide.
I’d like to know how the accountant proposes to amend a W-2 this late.
Permalink Submitted by Keith Kim on Thu, 2021-09-09 14:22
Thank you. He mentioned about being able to amend, but it will be very costly. Looks like ther are there three ways to correct under EPCRS. SCP seems to be the right way as the tax year to be corrected is last years. is that the right way?also, by using EPCRS, regardless of which one of the three used, the excess contribution amount need NOT be rutrned, correct?