Penalties for Non-Deductible Contributions and Timing
My Pension Tree, LLC
5 min read • Published • Updated
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Business owners should understand the penalties and timing requirements for employee retirement plan contributions. Following these rules helps prevent expensive penalties while maximizing tax benefits from the contributions.
Penalties for Nondeductible Contributions
More retirement plan contributions than are deductible give no gain, but it incurs a penalty. Under Code section 4972, there is a 10% penalty on the non deducted part of the contribution. However, certain plans that combine defined benefit and defined contribution plans have exceptions.
Key Points:
Contributions Over The Limit: There is a 10% penalty on non deducted portions of contributed amounts that exceed its limit.
Exceptions: Some exceptions include matching contributions, the first 6% in Defined Contribution Plan or certain amounts contributed to a Defined Benefit Plan.
Timing of Contributions
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The timing of contributions is crucial to minimum funding requirements and avoiding penalties. Contributions are considered made for specific years if they are made by due dates including extensions.
Key Points:
Contribution Deadlines: To count as belonging to that tax year, contributions must be made by the tax return due date (with extensions).
Profit Sharing Plans: These do not fall under minimum funding rules.
Quarterly Payments: If minimum funding requirements are not satisfied during one plan year then quarterly payments become necessary during next plan year. Due dates for such payments generally fall on April 15th, July 15th, October 15th, and January 15th.
Interest On Missed Payments: In case timely quarterly payments have not been made then interest penalties will be charged.
Elective Deferrals: Salary reductions under plans like 401(k) or 403(b) can only be deposited after fifteen days following payroll withholding at the most later date allowed.
Understanding these penalties along with timing requirements lets business owners ensure compliance between their retirement plans as well as tax laws thereby preventing unnecessary punishment while maximizing deductible taxes.
Next step
Have a compliance question?
Controlled groups, fiduciary questions, and testing failures are easier to fix early. Tell us what the plan looks like today.