Trying to figure out the application of IRC 404(a)(3) to a short taxable year, and having no luck. Facts: Employer is on a fiscal year taxable year ending 9/30, but profit sharing plan is on calendar year; employer paid contributions for plan year 2005 and deducted for taxable year ending 9/30/2006. Now employer is changing to calendar year taxable year and has a short year 10/1/06-12/31/06. How does employer deduct contributions for 2006 plan year? I thought it would be deductible in the short year, and if this were a DB plan I believe this would be correct, but 404(a)(3) limits the deduction to 25% of compensation paid to participants during the taxable year, and imposes an excise tax on the excess. Because of the short taxable year, the contribution is well over this 25% limit.

Certainly this is not a situation in which an excise tax is appropriate, and I feel that I am overlooking some fundamental aspect of this situation.

Has anybody had this issue?