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Calavera

Deduction when fiscal year and plan year are different periods

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Before PPA if the employer's taxable year did not coincide with the plan year, the deductible limit would be one of the following:

(1) The deductible limit determined for the plan year commencing within the taxable year, or

(2) The deductible limit determined for the plan year ending within the taxable year, or

(3) A weighted average of alternatives (1) and (2).

Once chosen, the method cannot be changed without the Commissioner’s approval.

1. It appears that PPA changed so that only the 2nd method is allowed. Correct?

2. Does the client need the Commissioner’s approval if he used 1st method in the past and now is forced to use 2nd method?

3. Can client continue to use 1st method?

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Anybody...

Does it mean:

a) We have no idea

or

b) We have some ideas but we are not going to put anything in writing

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404(o) DEDUCTION LIMIT FOR SINGLE-EMPLOYER PLANS. —For purposes of subsection (a)(1)(A) —

404(o)(1) IN GENERAL. —In the case of a defined benefit plan to which subsection (a)(1)(A) applies (other than a multiemployer plan), the amount determined under this subsection for any taxable year shall be equal to the greater of —

404(o)(1)(A) the sum of the amounts determined under paragraph (2) with respect to each plan year ending with or within the taxable year, or (Method 2 above)

404(o)(1)(B) the sum of the minimum required contributions under section 430 for such plan years.

These three methods were described in 1.404(a)-14© as "If the employer's taxable year does not coincide with the plan year, the deductible limit under section 404(a)(1)(A)(i), (ii), or (iii) for a given taxable year of the employer is one of the following alternatives:...".

Since it doesn't reference section 404(o) that was added by PPA, I am not sure what to do.

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How is the new language materially different than 404(a)(1)(A) for years before 2008: the amount necessary to satisfy the minimum funding standard provided by section 412(a) for plan years ending within or with such taxable year (or for any prior plan year), if such amount is greater than the amount determined under clause (ii) or (iii) (whichever is applicable with respect to the plan)

Because of this similarity I have heard the IRS considers the rules pre-PPA to still be in effect as outlined in the regulation you cited.

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Old 404 didn't provide for choice 1; it was allowed under the old 404 regs, which have not been rescinded.

If choice 1 is no longer permissible, then sponsors that used it have a year without a deduction. If this was Congressional intent, they can bloody well tell us. If IRS thinks this is how 404(o) works, they can bloody well tell us.

We are taking the conservative position that we can't add interest to the end of the fiscal year for the maximum deductible contribution, so we're not totally sure the old regs apply.

In other news, we found that by orienting half of the angels in an upside down position, we can increase the number that can dance on the head of a pin by 24%.

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Guest Dressageho

This may be beating a dead horse, but it actually looks like Section 1.404(a)-14© is still in effect for all types of plans described in Sections 404(a)(1)(A)(i), (ii), and (iii), which specifically exclude defined benefit plans described in Section 404(o). It does not look like Section 1.404(a)-14© should have been rescinded or that the additional option it provides (Method 1 above) should be applicable to DB plans covered by Section 404(o). Please note the underlined portions identified below.

1.404(a)-14© Use Of Plan In Determining Deductible Limit For Employer's Taxable Year.

Although the deductible limit applies for an employer's taxable year, the deductible limit is determined on the basis of a plan year. If the employer's taxable year coincides with the plan year, the deductible limit for the taxable year is the deductible limit for the plan year that coincides with that year. If the employer's taxable year does not coincide with the plan year, the deductible limit under section 404(a)(1)(A) (i), (ii), or (iii) for a given taxable year of the employer is one of the following alternatives:

1.404(a)-14©(1)

The deductible limit determined for the plan year commencing within the taxable year.

1.404(a)-14©(2)

The deductible limit determined for the plan year ending within the taxable year, or

1.404(a)-14©(3)

A weighted average of alternatives (1) and (2). Such an average may be based, for example, upon the number of months of each plan year falling within the taxable year.

The employer must use the same alternative for each taxable year unless consent to change is obtained from the Commissioner under section 446 (e).

404(a)(1)(A) In General

In the taxable year when paid, if the contributions are paid into a pension trust (other than a trust to which paragraph (3) applies), and if such taxable year ends within or with a taxable year of the trust for which the trust is exempt under section 501(a), in the case of a defined benefit plan other than a multiemployer plan, in an amount determined under subsection (o), and in the case of any other plan, in an amount determined as follows:

404(a)(1)(A)(i)

the amount necessary to satisfy the minimum funding standard provided by section 412(a) for plan years ending within or with such taxable year (or for any prior plan year), if such amount is greater than the amount determined under clause (ii) or (iii) (whichever is applicable with respect to the plan),

404(a)(1)(A)(ii)

the amount necessary to provide with respect to all of the employees under the trust the remaining unfunded cost of their past and current service credits distributed as a level amount, or a level percentage of compensation, over the remaining future service of each such employee, as determined under regulations prescribed by the Secretary, but if such remaining unfunded cost with respect to any 3 individuals is more than 50 percent of such remaining unfunded cost, the amount of such unfunded cost attributable to such individuals shall be distributed over a period of at least 5 taxable years,

404(a)(1)(A)(iii)

an amount equal to the normal cost of the plan, as determined under regulations prescribed by the Secretary, plus, if past service or other supplementary pension or annuity credits are provided by the plan, an amount necessary to amortize the unfunded costs attributable to such credits in equal annual payments (until fully amortized) over 10 years, as determined under regulations prescribed by the Secretary.

In determining the amount deductible in such year under the foregoing limitations the funding method and the actuarial assumptions used shall be those used for such year under section 431, and the maximum amount deductible for such year shall be an amount equal to the full funding limitation for such year determined under section 431.

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Why would 1.404(a)-14© only apply to plans described in 404(a)(1)(A)(i), (ii), and (iii), and not also to single employer plans?

1.404(a)-14(a) says that the purpose of the section is to provide rules for determining the deductible limit under section 404(a)(1)(A). That would be rules for all plans regardless of whether or not they are single employer plans.

404(o), itself, starts with the statement - "For the purpose of subsection (a)(1)(A)." That would be 404(a)(1)(A).

I don't think that there has been any change in the rules, and that the three options under 1.404(a)-14© still apply to all plans whether single employer or multiemployer.

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