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Deduction Limit Under 404(a)(1)(D)(iv)


Guest merlin

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Guest merlin

As of what date is the limit calculated? I have a Title IV plan that terminated as of 12/31/03, at which point the plan liabilities exceeded its assets by $500,000. Currently, as a result of increased asset performance, the shortfall is less than 400,000. Can the sponsor deposit and deduct the full 500,000? Or must he wait until the final distribution date to arrive at the amout necesary to balance assets and liabilities?

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Guest merlin

On pp. 7.333/334 The ERISA Outline Book seems to peg it at the date of termination, but that gives rise to your question, and mine as well. Even worse, what happens if the assets drop? In that case the plan can no longer be considered a standard termination, unless there is a substatial owner to waive, or the sponsor can afford to contribute more $. It would make more sense to calculate the final # at the date of distribution, but the EOB seems to disagree.

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What version are you referencing? I looked up the pages you reference and the discussion seems appropriate, but I don't see that Sal is espousing that the date of termination is the date the determination is made for the rule.

Personally, while I think the statutory language is unclear, it makes the most sense that the determination should be as of the date the distributions are made. What does seem puzzling though, and I will admit I haven't looked into it, is that what if the distributions go past 8 1/2 months of the following plan year? For a 12/31/03 date of plan termination where the distributions aren't made by 9/15/04, I don't see a mechanism to contribute and deduct contributions after 9/15/04. That is the only reason, I could see an argument for valuing the termination liabilities at a date different than the date of distribution.

"What's in the big salad?"

"Big lettuce, big carrots, tomatoes like volleyballs."

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Guest merlin

It's the 04 edition. And fwiw, I have the same questions you about using the distribution date to calc the limit.

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Guest merlin

On page 7.332, item 8.a., he refers to the PBGC requirement that "the plan's assets be sufficient to pay all pension liabilities, which are valued as of the plan's termination date...".For a standard termination ERISA 4041(b)(1)(D) requires that, as of the date of distribution the plan be sufficient for benefit liabilities "(determined as of the termination date)".

So maybe the answer is that the UBL is determined at the term date. If that creates an excess at distribution, treat the excess according to the terms of the plan. If there's a shortfall, contribute the difference, and deduct it over 10 years, as per 1.404(a)-6(b)(3). What do you think?

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I think those statements are unrelated to 404(a)(1)(D)(iv). All Sal is reiterating there is the PBGC standard termination requirements that the plan be sufficient to satisfy benefit liabilities.

So what are those requirements? While 4041(b)(1)(D) mentions the value of the benefit liabilites at the date of termination, I take that to mean that the benefits aren't still accruing after that date. See 4041(b)(2)(A)(i)(II) which outlines that the PV of the benefits is as of the date of distribution.

"What's in the big salad?"

"Big lettuce, big carrots, tomatoes like volleyballs."

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Guest merlin

So you think that having already certified to the PBGC that the plan is projected to be sufficient at the expected distribution date enables (forces?) the sponsor to contribute the UBL amount at the date of distribution? That's OK, but what happens if the distribution date comes after the minimum funding date?

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The actuary has to make a good faith effort to estimate the future liabilities and assets as of the time of funding. The actuary does not have to be right. Given the problems of over-funded plans, it is usually better to guess the contribution too low, making up to difference when the final distributions are done.

The actuary in your situation can recommend a deficit reduction contribution that comes up short of the liability without causing problems. For FASB expensing, you might consider accruing the full cost and taking the gain/loss at settlement when the final payment is made, but for minimum funding, I would encourage the plan sponsor to stay on the low side of the required deposit.

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  • 2 months later...

From ASPA Q&A 5:

1.Q: If the calculation is to be done at the date of distribution, what happens if that date is after 9/15/04?

A: We believe the sponsor should ba able to deduct the amount necessary to make the full distributions due.

2. Q: Can the sponsor contribute at leats the 412 minimum and deduct it on his 12/31/03 tax return?

A: Yes

3. Q: Can the sponsor the contribute the remainder of the UBL and deduct that amount at 12/31/04, even though the funding standard account stopped at 12/31/03?

A (written): Yes.

A ( from Jim Holland at the podium): Maybe not. Sec. 404 requires a plan, and the plan stopped at 12/31/03.

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Guest texasactuary

i have a similar situation where the funding for the UL, due to market performance, ends up with a little too much.

my logic was that since i only get to deduct that contribution up to the UL anything over that is not deductible. my document has the language that lets non-deductible contributions come out of the plan.

the plan is to pay everyone out, take the allowable fees and get the extra out as non-deductible.

am i coloring too far outside the lines here?

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I think the excess amount should be considered excess assets, and treated as such according to the terms of the plan: revert (with the attendant excise/income taxes), reallocate, QRP, whatever. I don't think it would be safe to treat it as a nondeductible contribution and just remove it from the assets. The Service has been pretty consistent over the years in saying that they are the ones who determine deductibility, e.g., on audit. And a contribution that is made conditioned on its being deductible that turns out not to be deductible is not a mistake of fact.

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Guest dsyrett

texas actuary

not sure of the magnitude of your nonded amount but there is a 25,000 deminimus return rule that may not require irs blessing.

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  • 2 weeks later...

I too have this same situation-plan term date is 12/31/04 and UBL are about $3M. The employer will make the contribution to fully fund, but there are about 500 participants and being able to pay everyone out by 9/15/05 is highly doubtful.

It seems from the prior discussion that the $3M contribution will be deductible-anything made by 9/15/05 can be deducted in 2004, and anything made after 9/15/05 can be deducted in 2005. The last Schedule B will be for 2004.

The 2004 actuarial valuation was prepared early in 2004 based on the assumption that the plan would be ongoing per the company's request. The termination decision was made last month and was unexpected. My question-is it necessary for the 2004 valuation to be redone to calculate a new maximum, or can the originally calculated maximum stand? Since contributions will surely be made after the 9/15/05 deadline for reporting on the 2004 final Sch B, is it acceptable to report only the contributions that don't exceed the original maximum on the 2004 Sch B and let the UBL calcs stand to justify the contributions over the 2004 maximum? I am confused about how this works on paper and what is required to justify the large final contribution.

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