Deductibility of EPCRS Corrections by Plan Sponsor (Posted December 8, 2002) Technical Tip 86: The following question and answer were from the IRS Q&A Session at the 2001 ASPPA Annual Conference: Rev. Proc. 2001-17 [now Rev. Proc. 2002-47] is the new EPCRS guidance. Appendix B contains a correction method for overpayments. The correction method is to first perform due diligence to get the money paid back. Failing that, it says that "the plan sponsor or another person" may contribute money to the plan to make up the overpayment. Assuming the plan sponsor contributes the money under this correction method, is it deductible? Is the deductible under 162, 404 without regard to the other 404 limits for the year, 404 with regard to the other 404 limits for the year, or something else? Response: The conservative approach is to use 404 as the basic rule. However, there may be an argument that 162 would be appropriate in some situations. Response by RLR&C ERISA Attorneys: We believe that the proper analysis is that correction payments for plan qualification defects, such as correcting a top-heavy failure, are deductible under IRC §404; however, restoration payments by plan sponsors for fiduciary breaches and prohibited transactions are, as a general matter, deductible under IRC §162, and not under IRC §404. Thus, as a general rule, restoration payments for ERISA fiduciary breaches are deductible under IRC §162, and correction payments for plan qualification failures are subject to the IRC §404 rules. For more information on when IRC § 162 might apply, click here. View all Tips © 2012 Reish Luftman Reicher & Cohen, a Professional Corporation Important notice: Answers are provided as general guidance on the subjects covered in the question and are not provided as legal advice to the questioner's situation. Any legal issues should be reviewed by your legal counsel to apply the law to the particular facts of your situation.