Maximum Tax-deductible Contribution

[Guest Beth Wright]

Background - I am working on a 12/31/01 end-of-year valuation. The sponsor also has a 401(k) plan (w/ employer match). The maximum has always been limited by 25% of eligible compensation. The employer contributes monthly to the DB plan (this is necessary for their cash flow purposes). During 2000, the sponsor contributed over the maximum (excise tax was paid) by $27,000. The full amount was reported on the Schedule B, thus adding the non-deductible contribution to the credit balance.

This year, the minimum is $525,000 and the maximum is $541,000. Since there is a $27,000 carry over from last year, does that mean th must contribute $525,000 but can only deduct $514,000 ($541,000 - $27,000) of it?

Thank you for your help!

[mwyatt]

Before responding, please confirm that

1) The $27,000 nondeductible contribution in 2000, which you (properly) showed on the 2000 Schedule B, is reflected in your FSA credit balance as of 12/31/00, but was not taken as a deduction on the 2000 tax return.

2) Your 2001 minimum contribution amount reflects the FSA credit balance and interest on contributions deposited during 2001, so that if $525,000 was deposited during 2001 (over and above the $27,000 deposited in 2000) the FSA credit balance would be zero.

3) Not sure about your maximum deductible contribution of $541,000; assume this number was calculated with 404 assets which were reduced by the $27,000 not yet deducted. Does the $541,000 reflect a reduction for the $27,000 or was the gross figure $568,000?

4) Combined plan limitations under 404 not the issue here; just trying to determine the deductibility of the DB plan.

[Guest Beth Wright]

Sorry for not giving enough information.

The $27,000 is in the FSA and was not taken as a deduction. The minimum of $525,000 does consider the FSA and would bring the credit balance to $0. The maximum of $541,000 is actually 25% of eligible compensation reduced for employee deferrals & employer match in to DC plan. The maximum before comparing to this limit was $579,000 and was determined with assets reduced by $27,000. If it weren't for the 25% of pay limit on deductible contributions (or next year when I don't have to reduce the pay by the deferrals & match), I don't think I would have this issue.

I hope this helps clarify the situation. Thank you so much for responding!

[Guest Beth Wright]

Sorry for not giving enough information.

The $27,000 is in the FSA and was not taken as a deduction. The minimum of $525,000 does consider the FSA and would bring the credit balance to $0. The maximum of $541,000 is actually 25% of eligible compensation reduced for employee deferrals & employer match in to DC plan. The maximum before comparing to this limit was $579,000 and was determined with assets reduced by $27,000. If it weren't for the 25% of pay limit on deductible contributions (or next year when I don't have to reduce the pay by the deferrals & match), I don't think I would have this issue.

I hope this helps clarify the situation. Thank you so much for responding!

[Guest Keith N]

Stiring the pot a little..... IRC Section 404(a)(7) limits the deduction to the GREATER OF 1) 25% of compensation ..... OR 2) "the amount of contributions made to or under the defined benefit plans to the extent such contributions do not exceed the amount of employer contributions necessary to satisfy the minimum funding stardard provided by section 412..."

Therefore, assuming that the extra $27,000 was contributed to the db plan in order to meet the Min. Funding Requirements, it WAS fully deductible, and a portion of the DC Plan's contribution was not.

You may be getting yourself wrapped up in a non-issue, at least as far as the DB plan is concerned. You most likely still have issues in the DC plan.

[Guest EBW]

I still haven't supplied enough information. Here's more. The compensation is $3,660,000. So I think the maximum deductible contribution for both plans is .25 X 3,660,000 = 915,000 (This is greater than the minimum required contribution for the DB plan of $525,000). Deferrals & match to DC plan = 374,000. This leaves a deductible contribution for the DB plan of $541,000.

[Guest Keith N]

I was really referring to the "extra" 27,000 deposited for 2000. My basic point is that 404(a)(7) does not automatically restrict the db deductible contribution, if fact I think it does just the opposite. Any db contribution necessary to meet min. funding requirements is deductible, regardless of the fact that when added to a dc contribution it causes the total to exceed 25% of payroll.

By your statement that "This leaves a deductible contribution for the DB plan of $541,000." you seem to be opperating under the assumption that it's the db contribution that caused the problem, when I think the Code seems to imply that the db takes precedent, and it's the dc plan that actually has a non-deductible contribution in it.