Allocation of Contribution

[Pension RC]

I am working on a defined benefit plan with a doctor and three staff people. The doctor's accountant wants to know how much of the 2013 contribution is attributable to the doctor's benefit. My first thought is to allocate to each participant a percent of the contribution equal to the percent that his/her TNC is of the total TNC. However, there is a funding surplus that wipes out the TNC, so the minimum is $0. Would this allocation method still be appropriate? Is there an alternate allocation method?

Any help would be appreciated!

[Andy the Actuary]

This is only an opinion and you may receive others, some of which may sentence me to actuarial death.

I would show the employees' contributions as the sum of their TNC. If the sum of their TNC is greater than the contribution, I'd prorate their cost based upon their own TNC. Whatever is left, if anything, is allocated to the doctor.

However, before you do anything, it's important to understand the purpose for which the accountant is asking the question.

For example, Schedule C, line 19 is where employee pension costs are reported. However, the instructions do not appear specific as to what you report if no contribution is made. I.e., can the employer take a deduction for on Schedule C if no contribution is made? The answer would seem like "no" but the accountant should make this determination.

[Pension RC]

Thanks, Andy.

First of all, why should contribution first be allocated the employees and not to the doctor?

Secondly, do you think it is plausible to allocate based upon the increase in their 417(e) lump sums caused by the 2013 accrual?

Thirdly, I'm not sure I understand your explanation of why it's important to understand the purpose for which the accountant is asking the question? Would the allocation method always be the same?

Finally, how could the employer take a deduction if no contribution is made?

Thanks.

[Andy the Actuary]

(1) You did not state the accountant needed this information for income tax purposes. Hence, my comment to ask.

(2) I'm telling you what I've seen done for Schedule C purposes. If the Plan were terminated underfunded, employees get their benefits, Doc takes the hit. Maximizing Schedule C deductions minimizes self-employment taxes.

(3) As far as other allocation methods, whatever makes sense to your client, accountant, and you.

(4) You could have had a situation where two docs but only one in the Plan. Perhaps, the allocation was requested for allocation of bonus purposes.

[Calavera]

There may be multiple reasonable allocation methodologies. ATA suggested one of them. Here is another:

1. Record NC per participant

2. Allocate any +/- adjustment to total NC by participant's target liability so sum of 1.+ sum of 2. = minimum required contribution

3. Allocate excess of actual contribution over the minimum required contribution (if any) by particpant's target liability

Additionally, I suggest to disclose that your desribed methodology is one of the reasonable methodologies but it is up to an accountant to decide if it is acceptable for tax purposes.