Limitation of deduction under 404(a)(8)

[Guest Gary A. Luing]

Sole practitioner has retired so little or no income on Sched C.

DB plan is underfunded just before termination, so $80,000 is required to fund but is not deductible under 404(a)(8) because of little income. Is the non-deductible amount carried forward, or does it become a basis in the assets in the trust, or is it lost forever?

[david rigby]

This does not smell right. Is the sole practioner the only participant in the plan? I thought a sponsor/owner/HCE could permanently waive whatever benefits are necessary to avoid the contribution in the year of plan termination.

[Guest Gary A. Luing]

Yes, the sole practitioner is sole participant.

Do you have the authority for your surmise--such as Code section or Reg or anything to hang the hat on?

Thanks.

[mwyatt]

He could waive (see several past discussions) portion of benefit necessary to bring liabilities equal to assets. The detail that is not provided here is where the $80,000 comes from: is this the amount of asset shortfall after all required contributions under IRC 412 have been made, or is part or all of this amount representing the final contribution developed by the 412 valuation covering the year of termination? IRS has never allowed you to waive a funding deficiency.

[Guest Gary A. Luing]

The $80,000 represents the final contribution under the 412 valuation for the year of termination.

[mbozek]

You need to look in the IRS termination guidelines for the procedure for waiving/ deferring the amount of the accrued benefit attributable to the shortfall.

[David]

My experience with the IRS has been in agreement with mwyatt, that you cannot waive benefits for 412 purposes. I am not aware of an execption for the year of plan termination. When you do the waiver for the plan termination my experience has been that the IRS requires the waiver to read "waiver of distributable assets" rather than a "waiver of accrued benefit".

[david rigby]

See if these help:

http://benefitslink.com/boards/index.php?showtopic=16104

http://benefitslink.com/boards/index.php?showtopic=5466