How is a contribution carryover handled in regard to profit-sharing plans?

In the context of profit-sharing plans, the proper handling of contribution carryovers is essential for ensuring compliance with Internal Revenue Service (IRS) regulations. When contributions exceed the allowable limits for a given year, this excess amount must be correctly managed to maintain the plan's tax-qualified status.

The correct procedure is to reduce future contributions by the amount of excess contributions carried over. This means that if an employer has contributed more than the maximum limit allowed for a plan year, the excess cannot simply be retained in the plan or distributed among participants, as that could lead to tax penalties. Instead, this excess amount acts as a negative balance against contributions in subsequent years, effectively reducing the total contributions that can be made going forward. This approach helps to ensure that the plan remains compliant by adhering to the contribution limits set forth by the IRS, while also avoiding the need for immediate corrective action, such as returning funds to the employer or participants.

This also ensures that the contributions made do not adversely affect the plan's benefits distribution in the future, preserving the intended benefits of the profit-sharing structure.