Employee Plans Compliance Unit (EPCU) - Current Projects - Small Plan IRC 415 Project
Why did I receive an EPCU Compliance Check Letter?
Our records show that your Form 5500 series return (5500-SF or 5500-EZ) reflected a contribution exceeding the annual Internal Revenue Code section 415(c) limit on a per person basis, without regard to rollovers.
What is the EPCU attempting to determine?
We want to determine if there was a IRC section 415 violation and if appropriate actions were taken to resolve the IRC section 415 issue and any related tax issue. If there was not a violation, we want to know what caused the reporting error on the Form 5500 series return.
What actions do I need to take?
Review your 2010 Form 5500 series return, participant allocation schedule, trust statements and the deduction per your income tax return.
The 2010 participant allocation schedule should reflect:
- a summary of the total contributions and forfeitures allocated to all participants, and
- each participant’s name, and his allocation of
- employer contributions,
- employee contributions (pre-tax and after-tax contributions should be listed separately),
- forfeitures, and
- the sum of the allocations to him.
The total allocations per the participant allocation schedule minus the employer cash contributions per the trust statements should equal the forfeitures per the allocation schedule. Only the applicable trust statements should be considered. The IRC allows contributions made in 2011 to be allocated for the 2010 plan year. Depending on the plan’s terms with regard to allocations, and the timing of contributions and benefit distributions, a portion of the current cash contributions may be part of the forfeitures amount.
The contributions shown on the Form 5500 series return should generally reflect the participant allocation schedule information. Forfeitures allocated to participants that were from contributions made for a prior year should not be reported on the return.
The sponsor’s income tax return should reflect the participant allocation schedule information. Forfeitures allocated to participants that were from contributions made for a prior year should not be deducted on the income tax return. The deduction may not exceed 25% of the sum of all participants’ compensation, and any portion of a contribution that applies to a participant’s allocation in excess of his IRC section 415 limit is not deductible. The portion of an employee’s salary he contributes to a 401(k) plan is usually deducted as wages, and it is not included as a contribution for the purpose of determining 25% of participants’ compensation. A Partner’s or a sole proprietor’s compensation is earned income, which is the net profit reduced by his retirement benefit and ½ of their self-employment tax. Partners and sole proprietors must deduct their retirement plan benefit on page 1, line 28 of their Form 1040.
If a discrepancy is discovered, please do not take any corrective action at this time. If corrective action is required, you will be advised by the person listed in the cover letter.
A link to Form 2848, Power of Attorney and Declaration of Representative, is included at the bottom of this electronic document. If you choose to have someone represent you during this compliance check, please fax the completed Form 2848 to the contact person identified in your letter.
If You Have Questions
Please feel free to contact the person listed in the cover letter with questions about this project and how it relates to your situation.
IRC section 415 limits benefits to the lesser of $49,000, or 100% of a participant’s compensation for 2010. The benefit limitation excludes catch-up contributions and rollovers. The 2010 catch-up limit for a 401(k) plan is $5,500; however the catch-up contribution when added to other 401(k) contributions may not exceed the participant’s IRC section 415 compensation. Only persons who are age 50 or older by the end of the plan year may make catch-up contributions.
The parameters for the original sample assumed the participants were entitled to a catch-up contribution. Allocations in excess of those limits may result in a taxable event.
The EPCU will mail the compliance contact letter and information request to a random national sample of plan sponsors and will issue a closing letter notifying the plan sponsors of our findings.
- Form 2848 (Instructions), Power of Attorney and Declaration of Representative
- Publication 560, Retirement Plans for Small Business
- Instructions Form 1040 Schedule SE, 2010 Instructions for Schedule SE (Form 1040)
- EP Exam Projects, Defined Contribution Form 5500EZ Examinations with Potential IRC section 415(c) Limit Excesses