Deductible Contribution Carryforward

[Just Me]

An employer sponsors a DB plan, and makes the section 404 maximum deductible contribution to the plan, but spreads it out over the year (i.e. 2001 contribution made over 2002). Some of the contribution will be made after the due date for the company's tax return (9/15) and therefore not be deductible. Let's say the company has cash flow reasons to do this, and the 412 minimum is timely deposited by 9/15. Does this escape the section 4972 excise tax, in that it is not more than the "allowable" amount for the year? (The company plans to deduct the "extra" amount for 2002.)

[david rigby]

Yes. (In following comments, I am assuming that the plan year and the company fiscal year are both equal to the calendar year. Also assumed is that there are not carryforwards from the prior year.)

IRC 4972 imposes an excise tax on amounts contributed "for the taxable year" [cite is section 4972©(1)(A)(i)]. By the way I read your description, the amount contributed by 9/15 was at least equal to the 412 minimum but less than the 404 maximum for the prior plan year. Thus, 4972 is not violated. Stated another way, any amounts contributed after 9/15 may not be counted as contributions for the plan year ended on the prior December 31. Amounts contributed after 9/15 will thus be deductible in the current fiscal year.

Depending on other factors such as cash flow and taxable income, if (by 9/15) amounts more than the 412 minimum have been contributed, then the plan sponsor has the flexibility to determine what plan year this "excess" will be applied to.

[Mike Preston]

I'm not sure I understand what the intent is. While I agree that the amount contributed is not subject to an excise tax, I think that it is a bit more complicated with respect to whether the contribution not deducted in the prior year becomes deductible in the subsequent year. That is, the deduction for the 2002 year is determined based on the valuation for the 2002 year. If that valuation indicates that there is a full funding limitation in effect, the mere fact that the total contributed in 2002 was less than the 404 maximum for 2001 won't mean that the carryover (if you want to call it that) is deductible.

[david rigby]

Oops, I left something out. Mike is correct.

Also a good point about "what is the point."

[Just Me]

Thanks for the comments. To clarify the facts, yes, both the employer and the plan are calendar years. I understand that the amount "carried over" won't be "automatically" deductible for 2002 unless the actuarial valuation for 2002 shows that there is an allowable amount within deduction limits (and it's not otherwise fully funded, etc. etc. etc.).

The "what's the point" part is very complicated, but the simple version of the story is that the employer wants to make $X of contribution for various reasons, however, for cash flow reasons, it's better to be spread out over 12 months in 2002 rather than all deposited by 9/15.

Thanks again for your thoughts

[david rigby]

There might be another point w/r/t the "cash flow" issue. If the funded status of the plan, and the actuarial funding method, permit a contribution range, then the employer can make his $X contribution per month to even out cash flow (a good idea in my opinion), staying within that range. This lessens your worries about "not enough" or "too much."

If the spread between the min. and max. contributions is small, then a change in funding method might create some flexibility.