How is deductible limit calculated for a money purchase plan when plan

[John A]

How is the deductible limit calculated for a target plan or money purchase plan when the tax year and/or plan year is changed?

For example:

1) Tax Year is Calendar Year 2003.

Plan Year is Changed from 7/1/02-6/30/03 to calendar year, creating short plan year 7/1/03-12/31/03?

2) Tax Year is 10/1/02-9/30/03, and is changed to calendar year, creating a short tax year 10/1/03-12/31/03.

Plan Years are 11/1/02-10/31/03 and 11/1/03-10/31/04.

How is deductible limit calculated?

[Mike Preston]

Due to EGTRRA change, deduction is limited to 25% of compensation paid during the relevant periods. In example 1, it is 25% of compensation paid during the tax year 1/1/2003 through 12/31/2003. Anything that wasn't deducted from the 7/1/02-6/30/03 plan year in the 12/31/2002 fiscal year would be deductible in the 12/31/2003 year as would 100% of the contribution for the short plan year ending 12/31/2003. Note, however, that the 25% applies. Hence, it is questionable plan design to allow the design of the plan to provide for a contribution for the 12/31/2003 year, which, when added to the contribution for the 6/30/2003 plan year that was not deducted on the 12/31/2002 tax return, exceeds 25% of 12/31/2003 compensation. However, there may be legitimate reasons for designing a plan that calls for more of a contribution than the deductible limit. In that case, with careful planning, one could contibute the balance in 2004 and deduct that on the 12/31/2004 tax return.

In example 2, the deductible limit for the 9/30/03 tax year i 25% of the compensation paid during that 12 month period to those that participate in the plan. The deductible limit for the 12/31/2003 tax year is 25% of the compensation paid during that 3 month period to those that participate in the plan.

Again, the specifics of the plan years don't matter all that much except for the fact that if they call for a contribution that is not deductible, then one has to question the plan design.

[John A]

Thanks, Mike.

Would any of the adjustments specified in Rev. Rul. 80-267 apply to the short tax year, 10/1/03-12/31/03, for determining the deductible limit for a money purchase or target plan?

[Mike Preston]

Not after 1/1/2002, unless the IRS sees fit to re-create them via proper guidance, per EGTRRA.. Whether they will or not remains to be seen. Until they do, the old rules with respect to profit sharing plans are now effective with respect to money purchase/target benefit plans.

[John A]

Mike,

So you believe that 404(a)(3)(A)(v) replaced 404(a)(1)(A)(i) for money purchase and target plans, rather than begin in addition to 404(a)(1)(A)(i)?

In other words, you believe the EGTRRA deductible limit for money purchase and target is

1) 25% of compensation for the taxable year,

rather than:

2) the lesser of:

a) 25% of compensation for the taxable year, or

b) minimum funding for the plan year ending within the tax year?

Why do you think 1) is true rather than 2)?

[Mike Preston]

I don't see how one can have both 404(a)(1) and 404(a)(3) applicable to the same plan.