25% Deduction and off-calendar plan year

[kocak]

The employer's tax year is the calendar year, the plan year ends 9/30.

I know the EGTRRA provisions increasing the deduction limit to 25% are for tax years beginning after 12/31/01. In this case, the TAX year is 2002.

Can I allocate 25% of compensation for the plan year ending 9/30/02 on compensation from 10/1/01-9/30/02? I'm thinking I can deduct 25% in 2002 but it might have to be on 2002 compensation.

Or do I have to wait until 9/30/03 plan year to increase to 25%?

Thanks.

Michele

[Guest R. Daestrom]

I believe the answer is yes, you can allocate 25% for the plan year ending 09/30/2002. In fact, even if the 404 limit had remained at 15%, I believe you could still take a greater than 15% deduction in this case. The explanation as to the "why" and "how" I'll leave for you to read in Sal Tripodi's "ERISA Outline Book", page 7.325, which gives a nice answer to a situation similar to yours. I'll just jump to the application of it.

The max deductible amounts are going to be based on the taxable year compensation, so the 2001 max deductible is based on 1/1/01 - 12/31/01 comp, 2002 max deductible is based on 1/1/02 - 12/31/02 comp, etc... For plan allocation purposes, you are going to use plan year comp, which is presumably 10/01/01 - 9/30/02 comp. So what you have is calendar year comp determining what is the max deductible, being allocated on a plan year comp. basis. The timing of the contribution deposits is critical in order for this to work. Again, check 7.325 of Sal's book for those details. You basically have a good bit of wiggle room in determining what plan year to apply deductible contributions too.

[kocak]

Thank you. I was stuck on 7.285 and it wasn't clear to me in that section. I'll see what the client wants to do. Thanks again

mck