It is possible that all or part of quarterly installment payments made during a year exceed the amount which is deductible for that year. If this occurs, the excess amount is available as a carryover to succeeding years and is deductible in a succeeding year to the extent of the difference between the actual deductible contribution made in the succeeding year and the maximum amount deductible for that year. IRC Sec. 404(a)(1)(E). The carryover is only deductible in a year when contributions made for that year are less than the amount deductible.

Sec. 4972, enacted by TRA 86, imposes on the employer an additional 10% tax on non-deductible contributions. The 10% tax is imposed for every year that a contribution remains as an excess contribution. Thus, not only is the employer unable to deduct the contribution, it is also subject to a penalty.

Refund of Excess Contribution

Once a contribution has been made to a pension plan, the ability of the employer to obtain a refund is severely restricted. Sec. 401(a) lists the provisions that a plan is required to satisfy in order to be a qualified plan. Sec. 401(a)(2) requires that plan assets may be used only for the exclusive benefit of the employees or their beneficiaries. Moreover, Sec. 403(c)(1) of ERISA prohibits the diversion of plan assets. However, Sec. 403(c)(2) of ERISA permits the return of a contribution made by an employer in either of the following circumstances:

1. The contribution was made because of a mistake of fact;

2. The contribution was made on the condition that the plan qualified and it is subsequently determined that the plan did not qualify; or

3. The contribution was made on the condition that it was deductible.

Thus, an employer that makes an excess contribution to the plan is subject to a 10% penalty on the amount of the contribution and is also restricted in its ability to recover the excess contribution.

Reversion of Excess Contribution

The 10% penalty is imposed on the portion of a contribution to a plan that is in excess of the amount deductible for the year. However, the amount subject to the additional tax is reduced to the extent a contribution is returned to the employer by the last day for making a contribution to the plan (the extended due date of the return) and the excess contribution was due either to: 1) a mistake of fact; 2) the plan was not initially qualified; or 3) the contribution was not deductible. Secs 4972(c)(3) and 4980(c)(2)(B)(ii).

Although the penalty provision, as indicated, provides for an exception if the excess contribution is timely returned to the employer, the employer must still overcome the restrictions which require that the plan assets must be used only for employees and beneficiaries.

Rev. Rul. 77-200 discussed circumstances under which a plan may refund employer contributions without disqualifying the plan. One such circumstance in which a reversion is permitted is where the employer's contribution is conditioned on its being deductible and the deduction is disallowed by the IRS. Thus, the excess contribution may be refunded to the employer and the 10% additional tax avoided if the IRS disallows a deduction for the contribution.

There is a Mechanism

In recognition of the fact that the determination of the amount required to be deposited to a plan is complex and that an over- contribution would not be deductible and would result in the imposition of a penalty on the employer, the IRS, in Rev. Proc. 89-35 effective for 1988 and 1989, provided a mechanism for the employer's obtaining a ruling disallowing the deduction to the extent of the excess contribution, thereby permitting the return of this amount to the employer without jeopardizing the plan qualification. Rev. Proc. 89-35 required that the ruling request be made within 2 months after the end of the plan year.

Rev. Proc. 90-49, which is effective for plan years beginning after 1989, supersedes Rev. Proc. 89-35. Rev. Proc. 90-49 provides for a deadline for requesting a ruling which is the later of:

1. Two and a half months after the end of the plan year; or

2. Six months after the valuation date that is reported on Schedule B of Form 5500 for the plan year under consideration.

Although Rev. Proc. 90-49 extends the period for requesting a ruling, it is imperative that the ruling is requested as soon as possible as the penalty for the year is avoided only if the excess contribution is refunded by the extended due date of the return.

De Minimis Rule--Permitting

Reversion Without a Ruling

Rev. Proc. 90-49 sets forth a de minimis rule under which an employer may obtain a reversion of an excess contribution without requesting a ruling if the following conditions are satisfied:

1. The amount in question is less than $25,000;

2. The plan must permit the return of contributions to the employer if they are determined by the IRS to be nondeductible;

3. The contribution is conditioned on it being deductible with such condition stipulated either:

a. in the plan document, or

b. in the plan document in combination with a certified board of directors resolution.

The language may be returned is not adequate; the terms must or shall are adequate.

4. The employer receives an actuarial certification as to the appropriateness of the return of the contribution. The actuarial certification, plan language and board resolution, if applicable, must be attached to Form 5500. Furthermore, the employer must attach to Form 5500 a certification that the contribution which is being returned has not been deducted. The revenue procedure states that the return of contributions that were not conditioned on deductibility will result in the loss of plan qualification.

IRS Ruling Permitting Reversion

Rev. Proc. 90-49 provides that the IRS will issue a ruling within 90 days of receiving the information that it requires to enable it to render an opinion.