Tax Max under IRC 404(a)(1)(D)

[Guest meggie]

Is there any official IRS guidance on how the unfunded current liability is computed for tax max purposes under 404(a)(1)(D)?

Questions 11 and 14 from the 1993 EA Graybook indicate that computation includes interest and normal cost accruals to the end of the applicable plan year. Question 7 from the 1995 EA graybook indicates that including CL normal cost is undecided (not sure if "undecided" also relates to interest accruals to end of the plan year) . Question 18 of the 1995 EA graybook asks--if accruals during the year were added to the Unfunded CL as of the beginning of the year and the plan sponsor made the "year end" tax max under 404(a)(1)(D) at the beginning of the plan year, if the full amount could be deducted. (Response was that there was no guidance).

[david rigby]

Not sure I understand your question but here's my 2 cents.

The calculation of the CL for 404 purposes must use the same CL interest rate as used under 412 (whether or not that is the maxmimum rate). I have always interpreted the 404 calculation to mean the estimated EOY amount, including CL normal cost, interest at the CL rate, and estimated benefit payments thru the EOY (payments also adjusted with interest). This is then compared to the estimated EOY asset value, including interest at the valuation rate, and estimated benefit payments with interest.

[Guest meggie]

Sorry my question was muddied.

I too have calculated the Unfunded CL for tax max purposes as of the end of the plan year- (no dispute on the mortality or interest rates used). However, the question is - does the IRS say anywhere that you have to compute the tax max under 404(a)(1)(D) as an end of year #. Although 404 points me to 412(l), it doesn't really dictate how the number is computed (beg of year, end of yr etc). Hence, the confusion in the graybook Q&A's as I mentioned in my first message.

If there is no guidance, do you agree that the tax max under 404(a)(1)(D) can be a beginning year #? The employer has a very good reason why he wants to show a lower tax max.

[david rigby]

I think this (and the original FFL) must be as of the end of the plan year. Consider a new plan with no assets and no recognition of past service. If you test at BOY, then you have a liability of zero, offset by an asset of zero. That does not make sense, so project both to the end of the year, include normal cost and interest.