Deduction on Terminated One-Person Plan

[Andy the Actuary]

FACTS

1. Amenment timely adopted to terminate one-person DB Plan 12/31/2014.

2. IRS D-Letter received in July

3. Calendar year plan; BOY valuation.

4. Participant compensation always 100,000 except learned in 2015 that participant 2014 compensation 275,000.

5. 2014 5500EZ/SB NOT YET filed

6. No contributions yet made for 2014

7. 2014 Maximum Deductible determined as of 1/1/2014 = $300,000

8. Lump sum = $2,000,000

9. Plan assets = $1,000,000

Questions

1. Is $1,000,000 the deductible amount even though Plan not a PBGC plan? If not $1,000,000, then what?

2. Regardless of how much deductible, can it all be deducted in 2014 or is $300,000 maximum deductible in 2014 and the rest in 2015?

[mphs77]

On item 4.

you learned in 2015 that participant compensation was 275,000 for which year(s)?

[My 2 cents]

$275,000 is too big, even for the limitation year beginning in 2015. The 401(a)(17) compensation limit for the 2014 limitation year was only $260,000. Nothing above that could have been recognized for plan accrual purposes. The compensation limit for 2015 was $265,000.

How did the plan determine plan accruals? Final year earnings, final 5, highest 5 ever?

To get to a lump sum of $2 million, the plan had to have been in existence for 10 years or so, right? For Section 415 compliance (10 years of participation?).

Why, if the plan is not well enough funded to pay the benefit, did the participant decide to terminate the plan?

And if the lump sum is $2 million and the assets $1 million, how can you possibly have a $300,000 limit on the deductible?

Sorry, just not understanding how this is all possible.

[Mike Preston]

I think it is a BOY val and $100,000 was comp for all years through 12/31/2013. Comp for 2014 was 401a17 limit. Max deductible still should have been about $500,000 but whether it is $300,000 or $500,000 doesn't change the result. Unless you are willing to re-do the 2014 valuation to change what you thought was a reasonable assumption of $100,000 for projected 2014 coomp to some larger number, then $300,000 is the max for 2014. As far as deducting the rest in 2015 we have no guidance (note that Kyle from the IRS announced at the ACOPA symposium that 404 regs are at least "in process" now) and won't until we see the 404 regs. Note that the last valuation date for MRC purposes was in 2014, so if you are going to do a valuation in 2015 for 404 purposes you are "guessing" that the final 404 regs will allow it.

[Andy the Actuary]

Mike, I considered (and may decide to) redoing the 2014 valuation using a higher comp assumption, which would not need to be the limit. I thank you because you answered my question, "There is no answer" about what is deductible in 2015. The other side of the coin is this is not a new issue and I have to believe that most plan sponsers would not make a nondeductible contribution.

[Mike Preston]

Not knowingly.

[rcline46]

Did you read the document? Our DB document states that changes in compensation are recognized in the NEXT year. That means the $260,000 is NOT a factor and the accrued benefit is locked in as of 12/31/14 based on prior compensations. Again, read the document for when compensation can be used.

[Calavera]

Since amendment was timely adopted before 12/31/2014, make election under 412(d)(2) to recognize it as of 1/1/2014. Then change assumptions to immediate retirement and $100k of annual benefits. It should bump your max to the level you need to deduct it all in 2014.

[Andy the Actuary]

This has now become hypothetical because client's CPA wants to deduct in 2014 and I can deal with this without a plan amendment.

The issue, which is now of only academic interest, is what governs deductibility of non-PBGC plans when contribution is made in year subsequent to the year of Plan termination and they want to deduct in the year subsequent to plan termination.

[Mike Preston]

Huh?

If they want to deduct it in 2014 then the deduction takes place in the year of Plan termination, not in the year subsequent to the year of Plan termination.

So, what issue concerns you?

[Andy the Actuary]

Mike et al, please see edited post for concern. So we're talking about taking a deduction in 2015 (not 2014) when plan terminated in 2014.

[Mike Preston]

But, but, but.. post #9 now says 2014??????????? Which is it?