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February 23, 2009

Excess nondeductible employer contribution

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Definition

Contributions to a qualified plan, 403(a) annuity plan, or a SEP IRA in excess of the deductible limit.

  • SEP IRA: An employer may deduct up to 25% of compensation paid to eligible employees. Prior to 2002, the limit was 15% of the reduced compensation paid to eligible employees
  • Profit Sharing plan: An employer may deduct up to 25%  of compensation paid to eligible employees. Prior to 2002, the limit was 15%
  • Money purchase pension plan: An employer may deduct the amount required to be contributed to the plan, as indicated in the Adoption Agreement. This amount cannot be more than 25%  of compensation paid to eligible employees

Contributions in excess of these amounts are excess nondeductible contributions.

Referring Cite

IRC § 4972, IRC §  404(c), IRC §  404(h)

Additional Helpful Information

  • Generally, a 10% excise tax applies to nondeductible employer contributions, unless steps are taken to correct the excess on a timely basis
  • For excess nondeductible SEP employer contributions, the employer is required to treat the excess amounts as W-2 wages for the affected employees. The employees are required to notify their IRA custodians of the excess SEP contributions, so that the custodian can change the amounts from SEP contributions to IRA contributions on their IRA accounting systems. If the amounts result in excess IRA contributions, they should be corrected accordingly.
  • For defined contribution plans, the excess nondeductible contribution should be carried forward to the nest year, until it is used up. For instance, if the excess occurs for 2008, it should be carried forward ( on the employer’s books and records) to 2009 and future years, until the excess no longer exists.

Written By

Denise Appleby

Denise is CEO of Appleby Retirement Consulting Inc., a firm that provides IRA resources for financial/ tax/legal professionals. She has over 20 years of experience in the retirement plans field, which includes training and technical consultation.

Denise writes and publishes educational /marketing tools for advisors; available at http://irapublications.com. Denise co-authored several books on IRAs

Denise is a graduate of The John Marshall Law School, where she obtained a Masters of Jurisprudence in Employee Benefits, and has earned 5 professional retirement designations.
She has appeared on numerous media programs, sharing her insights on retirement tax laws.

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