Deductibility issue

[kmciver]

I have a compliance client that is a S-Corp. Files returns on calendar year basis. They has a ps plan that has a 9/30/02 year end, which they never changed. I just found out that they started a 401(k) in April 02 (plan year 1/1/02 to 12/31/02). What can they contribute to the ps plan? The plan is updated for EGTRRA, but I'm not sure that it makes a difference. Thanks Karen

[mbozek]

IN order to be deductible, the contributions must be paid in a taxable year of the employer which ends with or within a year of the trust for which it is tax exempt. Reg. 1.404(a)-3(a). You need to know when the fiscal/tax year of the trust ends. If the PS plan trust tax year ends 9/30/02 then the contributions made by 9/30/02 would be deductible for the employer's tax year ending 12/31/01. The rules for determining the allocation of deductions when the tax year of the employer and the trust do not end on the same date are very complicated and should be determined by the accountant who will prepare the employer's tax return.

[Mike Preston]

In my experience, the accountant will turn to the pension professional to determine the amount deductible. Further, my understanding of the rule is a bit different from the way mbozek described it. If a contribution is made during the 3 month period ending 12/31/2001, then that amount is deductible on the 12/31/2001 tax return (I'll ignore contributions made before 10/1/2001 for now) if, and only if, the trust is tax exempt for its year ending 9/30/2002. However, since we usually make the assumption that for qualified plan purposes, the trust remains qualified at all times, the logic becomes much more simple. If the contribution is made, it is deductible for the fiscal year during which it is made, subject to the overall deduction limits, of course.

The one modification is 404(a)(6) which allows you to make a contribution after the end of the fiscal year, to as late as the due date of the tax return, and still deduct it on the tax return, but only if it is allocated as if it were contributed on the last day of the fiscal year.

I certainly agree with mbozek's statement that the rules are complicated, though.

I am amazed at how often the language mbozek cites is confused as meaning something it doesn't. It is a red herring in most circumstances. It only has relevance if the trust has a year where it is not qualified. When that happens you have much bigger problems!