Client A has a paired, standardized MP and PS plan with a year end of 9/30. Sponsor is C Corp. Only one employee and one participant. Sponsor has already funded $30K of current year contribution. Sponsor now wants to install a DB plan for current year to make a $90K contribution. However, there's no way to take back the $30K contribution to the DC plan, precluding the $90K contribution.

If the corporation does not take as a deduction the $30K contribution to the DC plans, the deductible $90K contribution to the DB plan is possible. Sponsor is subject to excise tax for the $30K to DC plan--and this is a small price to pay for Sponsor to get an "extra" $60K of deduction. But this excise tax continues each and every subsequent plan year because reoccurring DB contribution never allows for an allocation of the $30K DC contribution.

Of the facts above I am certain. Now here are my questions. If we terminate the DC Plans and distributes assets, what happens to the $30K? It can't go back to the Corp presumably. Can it get rolled over to the participant? Does the Excise Tax problem simply go away, it being a one time event? So pretty good to me!

Does anyone have experience with this? Can you give me a siting?

Thanks very much.

Two times, year deposited and year distributed.

And I think it is rollable, although no original deduction so it will be doubly taxed, which is a real bummer on top of excise taxes.

Once distributed, not in trust, so no excise tax.

Do you have any Regs you could cite for me or Opinion Letters?

I've seen documents that have a provision allowing a contribution that was made as a result of a "mistake of fact" to be returned to the Employer within 12 months of the date of the deposit. Perhaps adding such a provision can help if it's not too late? However, I'm not sure whether the excise tax for nondeductible contributions would still apply in such a situation.

My understanding is that the IRS would be the one to determine if a mistake in fact has occurred. Notwithstanding whether the Plan provides for it or not, such contributions as determined by the IRS could be returned.

Be very careful with the "mistake of fact" approach. The mere nondeductibility of a contribution is NOT a mistake of fact. Take a look at Rev. Proc. 90-49, as well as IRS Notice 89-52, and PLR 9144041. I think you'll find that your situation won't allow use of this.