Deductibility of Contribution of funding liability on termination of d

[Guest Star Seeker]

Defined Benefit plan (not covered by PBGC) froze benefit accruals and terminated the same date in 1999. Plan filed for FDL (received too). Final true-up contribution to be made this year to cover funding liabilities. Is the contribution fully deductible this year? Can the deduction be spread over a few years?

[Guest sdolce]

I don't see any way to get the full deduction this year.The plan's funding standard account ended in on the termination date in 1999,as per Rev. Rul. 79-23,so you don't have a minimum funding requirement under 412.You can only deduct it over 10 years under 404(a)1)(A)(iii). I don't think EGTRA will help you either.

[AndyH]

Check out the comments on page 9 of the corporate summary here. This link comes from a post by MGB a day or two ago.

It basically says the answer to this question is unclear, but it might be possible to deduct part in 2001 and the remainder in 2002.

http://www.milliman.com/empl_ben/publicati...eginfobulletins

If the link doesn't work, it's in a post under Retirement Plans in General related to EGTRRA credits for start up fees.

[MGB]

(Assuming a non-PBGC plan can do this under EGTRRA.) Preliminary statements by Treasury have been that they will only allow the new EGTRRA provisions to terminations after 12/31/01, not carryovers. However, that is probably not the final word. This is something they need to provide guidance on.

Note that the legislative history is that this provision should not apply to non-PBGC'd plans. It was a drafting error in the conference committee that overrode this section. I expect a technical correction in the future.

[Guest sdolce]

First,even with a correction extending the improved EGTRRA funding limits to non-PBGC plans,the amended language of 404(a)(1)(D)(i) refers to the unfunded current liability under 412(l),and (iv) refers to a plan which terminates during the plan year. The "plan year"is the last year to which 412(l) applies,which in this case is 1999.

Second,should future guidance permit,will a plan that terminated in 1999 but waited until 2002 to distribute its assets meet the "as soon as administratively feasible" requirement of Rev. Rul. 89-87?

[AndyH]

There must be countless 1999 or 2000 terminations potentially affected by this. I know I have a couple.

In the worst case scenario, shouldn't we consider revoking the termination and restarting that process in 2002 (dependent upon the interim accruals of course)? Is there anything that would prevent such a plan from being subject to the new EGTRRA deduction rules?

[Guest sdolce]

In theory I guess the answer is no. But what about possible funding deficiencies for 99 and (shortly) for 2000?

[AndyH]

Good points, though it may be possible to avoid such a problem if benefits were frozen or under other circumstances.

For example, I have a calendar year plan which terminated 12/31/2000 which contributed for 2000 based upon a 1/1/2000 valuation. Now, we're expecting an FDL very shortly and I don't think we can go beyond 12/31/2001 under the normal termination guidelines. So, there's no deficiency, and wouldn't be until 9/15/2002 at the earliest, by which time we could have refiled and made a full contribution to make the plan sufficient.

Then, doesn't it become fully deductible?

[Guest sdolce]

If I understand your situation you're proposing to rescind the 12/31/2000 p-term,then re-term and re-file with PBGC and IRS with a 2001 term date, and contribute the EGTRRA maximum in 2002. I don't think this is kosher, because you're p-term date is still in 2001.I think you have to terminate in 2002 to get the EGTRRA limit. I think the best you could do is term in 2001,then try to make a contribution based on 404(g) by 9/15/02.It won't be perfect but it might help.

[AndyH]

Sorry, I was unclear. Yes, I meant re-term in 2002 and contribute at least some by 9/15/2002. This is pretty radical, and pretty ridiculous, but it may be worthwhile for some sponsors if the IRS takes a rigid interpretation, it seems to me.

[Guest sdolce]

By "some by 9/15/20002" I assume you mean the 412 minimum for 12/31/2001. After that I think your approach is OK. Don't forget the PBGC premiums for 2001 and 2002.

[Guest Star Seeker]

Thanks for all the valuable input. I am an ERISA junkie, but not too knowledgable on DB plans. I mostly work with DC plans. I posed the same questions to the IRS and oral advice from the IRS last week indicated that the liability was required funding under 412 and, therefore, fully deductible this year under 404(a).