Flip-flop method question

[Blinky the 3-eyed Fish]

In using the flip-flop method to get around the deduction limits of 404(a)(7), specifically in the years that 2 years of DB contributions are deducted, how is one able to get around the last sentence of Announcement 98-1 1.2.1.1(2) as follows:

"A special rule provides if amounts required under IRC 412 were paid for the preceding year but were not deducted solely because they were not timely paid for IRC 404, they are "includible contributions" and are deductible under the IRC 404(a)(1)(A)(i) rule for the current year. Note, however, that total deductions under IRC 404(a)(1)(A)(i) are subject to the applicable full funding limit."

I have never seen the last sentence addressed in any examples of using the flip-flop method, so what am I missing?

[actuarysmith]

RUN FOREST, RUN !!!!

I don't have an exact answer to your question. However, I am interested in the topic.

Our firm has not brought up flip-flop with any clients or advisors because in our estimation we don't have any combination of clients and plan advisors that can follow directions that carefully.

Do you? Does this really work in practice?

[Blinky the 3-eyed Fish]

We do not prescribe this ever, nor do I intend to in the future. This question relates to a takeover of a client whose prior actuary got them into it.

[Guest merlin]

Blinky, I'm confused (not unusual). I'm reading the cite (and the example thereafter) to support the "double db plan deduction" portion of the flip-flop,rather than negate it,as long as you're still within the current year's FFL. Having said that, I still won't use the flip-flop for the reason given by actuarysmith.

[Blinky the 3-eyed Fish]

I found this language in 1.404(a)-14(e), which does not mention the full funding limit. I guess now I don't understand Announcement 98-1, but I have my answer at least.

(e) Special Computation Rules Under Section 404(a)(1)(a)(i)

(1) In General.

For purposes of determining the deductible limit under section 404(a)(1)(A)(i), the deductible limit with respect to a plan year is the sum of--

(i) The amount required to satisfy the minimum funding standard of section 412(a) (determined without regard to section 412(g)) for the plan year and

(ii) An amount equal to the includible employer contributions.

The term "includible employer contributions" means employer contributions which were required by section 412 for the plan year immediately preceding such plan year, and which were not deductible under section 404(a) for the prior taxable year of the employer solely because they were not contributed during the prior taxable year (determine with regard to section 404(a)(6)).

[Mike Preston]

The language you are referencing, Blinky,. has to deal with a situation that is just not likely to exist in a flip-flop. I'm a big proponent of them, and with that, I only have a handful. But, back to the language in question. What they are saying is that if your 412 minimum for year one is $100,000 and you don't deduct it, and then it turns out that instead of having the 412 minimum (including the includible contributions from the prior year) be $200,000 (or thereabouts) it is ZERO (remember when assets used to go UP between valuation dates? sure you do!) you have the joy of a minimum funding violation for year 1 if you don't make the contribution, or, alternatively, a non-deductible contribution if you do!

Another reason that flip-flops are not for the faint at heart.

[Blinky the 3-eyed Fish]

Mike I don't understand why you say the language I reference in 1.401(a)-14(e) is not a situation that comes up in a flip-flop. Isn't it a situation that comes up in EVERY flip-flop?

In a flip-flop you deduct 2 years of DC contributions in one year and 2 years of DB contributions in the next year, and so on. In the year that you deduct 2 DB contributions you are deducting the prior year's DB minimum contribution that was contributed after the tax return was filed, an "includible contribution", and the current year's DB minimum contribution. Isn't the language in 1.404(a)-14(e) what makes it allowable to deduct both DB minimums?

As for your example, I don't follow that at all. Maybe it's because it's Monday, but I don't understand any of what you posted.

[Mike Preston]

Tell the truthy now, is "Blinky the 3-eyed Fish" a non-del-plume for my wife? Probably not, but you seem to have similar reactions to my meanderings. ;-)

No matter.

What I meant to say, but probably didn't, is that the includible contributions rule you mention most assuredly comes up. I certainly agree with you there. But just because a contribution is includible doesn't mean that it is necessarily deductible in the next year. The 404 limitation in the next year is limited to the lesser of the regular 412 minimum (which includes the includible contribution) or the ERISA/OBRA FFL. Take a case with $500,000 of assets on 12/31/20002, with a 412 required contribution of $100,000. Assume the next year's 412 is only $75,000. Now, the next year's 412 is based on a higher asset pool (no other reason why the cost would decline to $75,000 is being considered). But let's say that the increase in the assets would normally lead to an ERISA FFL of $X in the year where the 412 minimum is $75,000, where $X is less than ($100,000 + $75,000). Now, if X is less than $100,000, you have to put in the $100,000 to satisfy 412 for year (YYYY), but you can only deduct $X in year (YYYY+1).

That situation is not likely to come up, but when it does, it is painful.

[Blinky the 3-eyed Fish]

Mike, do you know where, other than Announcement 98-1 1.2.1.1(2), which I believe serves as a guide for the IRS auditors, it states that the FFL is considered? It certainly doesn't reference the FFL in 1.404(a)-14(e).

[Mike Preston]

No, I'm not aware of any other cite off the top of my head. Why would the FFL not be applicable? Do we really need a specific cite? I know that this issue has been discussed from the podium before. Maybe not in the context of the flip-flop method, but I'm pretty sure that Jim Holland has mentioned the fact that includible contributions don't override the FFL before.