Guest Article

(From the March 24, 2003 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits. Hyperlinks within the article have been added by BenefitsLink.)

Contribution to Defined Benefit Plan Is on Account of Prior Tax Year

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(Thanks to Natalie Weis of the EB Tax group for preparing and submitting this article.)

A recent PLR highlights a planning opportunity to accelerate deductions for retirement plan contributions. In PLR 200311036 (click), the IRS ruled that a contribution to a defined benefit plan made in 2002 was a contribution on account of the 2001 tax year and therefore deductible under IRC Section 404(a)(6) on the company's 2001 tax return. The plan year was a calendar year, and the company was a calendar year taxpayer.

The contribution was initially designated as a 2002 contribution in a letter to the plan's trustee. However, pursuant to subsequent advice by the plan's actuaries, the contribution was instead designated as a 2001 contribution in a follow-up letter to the plan's trustee. Later in 2002, the company deducted the amount of the contribution on its 2001 tax return and reported the contribution on its 2001 Form 5500 and the accompanying Schedule B. The amount was contributed to the trust prior to the extended due date of the 2001 tax return.

Because the final designation (as being on account of 2001) was made before the contribution was claimed on the company's tax return, the IRS disregarded the initial designation. The IRS concluded that since the contribution was on account of the 2001 tax year and the contribution was made not later than the time prescribed by law for filing the 2001 tax return (including extensions thereof), the company was entitled to deduct the contribution on its 2001 tax return.

Background

For deduction purposes, IRC Section 404(a)(6) provides that a taxpayer shall be deemed to have made a payment on the last day of the preceding taxable year, if the payment is on account of such taxable year and is made not later than the time prescribed by law for filing the return for such taxable year (or extensions thereof).

Revenue Ruling 76-28 provides that a payment made after the close of an employer's taxable year to which IRC Section 404(a)(6) applies shall be considered to be on account of the preceding taxable year if:

1. The payment is treated by the plan in the same manner that the plan would treat a payment actually received on the last day of such preceding taxable year of the employer; and

2. Either of the following conditions is satisfied:
   1. The employer designates the payment in writing to the plan administrator or trustee as a payment on account of the employer's preceding taxable year, or

   2. The employer claims such payment as a deduction on his tax return for such preceding taxable year.

Rev. Rul. 76-28 further provides that for purposes of the above requirements, a payment may be designated on account of the preceding taxable year in the manner provided above at any time on or before the due date of the employer's tax return for such year (including extensions thereof). In addition, it provides that once a payment has been designated or claimed on a return in the manner provided above as being on account of a preceding taxable year, the choice made shall be irrevocable and an employer may not retract or change such designation or claim.

Planning Note

Adherence to the above rules will allow a calendar year employer to deduct on its 2002 tax return a contribution made in 2003. The proper designation should be made (if any) and the contribution should be reported on the 2002 Form 5500 and accompanying Schedule B (if a defined benefit plan).

If you have any questions, please contact your Deloitte advisor.

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The information in this Washington Bulletin is general information only and not intended to provide advice or guidance for specific situations. Contact your Deloitte advisor for information regarding your specific circumstances. If you have questions or need additional information about this article and you do not have a Deloitte advisor, please contact Martha Priddy Patterson (202.879.5634) or Robert B. Davis (202.879.3094). Human Capital Advisory Services, Deloitte LLP, 555 12th Street NW, Suite 500, Washington, DC 20004-1207. Copyright 2003, Deloitte.

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