Is this contribution deductible?

[Blinky the 3-eyed Fish]

Here is the situation:

Defined benefit plan for a corporation with a 10/31 year-end terminates at 10/31/01. For that year-end there is a minimum contribution of $0 and a maximum contribution of $50,000. A contribution is made for 30,000 on 2/1/02. Another contribution is made 8/1/02 for the additional 20,000. However, the 8 1/2 month deadline for funding is 7/15/02.

Is there a way that this second contribution is deductible in the future?

[mbozek]

Is 10/31 the end of the plan year or the end of the er's tax year. I thought that under IRC 404(a) the contribution is deductible for the tax year if made not later than the date for filing the er's tax return with extensions. The 8 1/2 month deadline is for imposition of the 10% penaly for underfunding the plan, not claiming the deduction.

[Blinky the 3-eyed Fish]

10/31 is the fiscal year and plan year end. Obviously the contribution is made after the extended due date for the tax return (7/15/02 in this case since its a corporation), so it is not deductible for the 10/31/01 plan year end. I am trying to determine if there is a way to have it be deductible prospectively since the plan terminated 10/31/01.

[mwyatt]

Since the plan terminated, how was your funding status at the time of distribution (i.e., was the extra $20k needed to alleviate underfunding or did this amount just get added to excess assets under the Plan). Just trying to figure out if this money would qualify for deductibility as a payment to bring the plan into sufficiency.

[mbozek]

Since the contribution was made on 8/1/02 it should be deductible for the employer year ending 10/31/02 under IRC 404(a). There is no requirement that the contribution be made for the same tax year in which the plan is terminated. The late contribution will be subject to any penalities for underfunding under IRC 412. This is really an accounting issue since the employer will have to claim the deduction on its tax retrun.

[Blinky the 3-eyed Fish]

Mwyatt, the plan was underfunded at the time of distribution but not covered by the PBGC. I don't see an opportunity for a deduction though.

Mbozek, on what basis can the contribution be deducted for the plan year ending 10/31/02? The plan had terminated in the prior year, so there is no funding requirement and not a way to deduct unfunded liabilities that I know of. Also there is not a 412 issue since the required minimum contribution was $0.

[mbozek]

Under IRS rulings a plan is not deemed terminated until all assets are distributed from the trust. If the 20k contribution would have been deductible had it been made by 10/31/01 because it was necessary to provide an accrued benefit under the plan why would it not be deductible for the plan yr ending in 02? Alternatively why would the er want to make a contribution if there is no benefit that will be derived from the contribution?

[Blinky the 3-eyed Fish]

Mbozek, from my experience a plan is terminated when it is terminated. While 5500 filings may continue until the assets are distributed, that does not extend the termination date. In a DB plan the funding standard account is maintained through the year of termination. The extra 20k was deductible as part of the actuarial determination of the min and max contribution in that final year of the FSA. It was not specifically to fund an underfunded accrued benefit.

There is a rule for plan years beginning after 12/31/01 for PBGC covered plans that allows the funding of amounts to bring the assets up to the benefit liabilities. However, this rule is not applicable to this situation.

Lastly, the benefit of the 20k contribution is that it effectively went to the owner of the company. The benefit liabilities were greater than the assets at the time of distribution.

[mbozek]

Terminated when it is terminated sounds like a Yogism. My suggestion to rely on IRS precedents for the plan continuing for IRS purposes until all assets are distributed (it goes back to 1969) was to provide for substantial authority to take the 20k deduction in the 02 tax year. It is up to the accountant for the employer to determine if such a deduction is possible. While I am not an accountant it my understanding that deductions for db plan contributions can be carried over to future years under Reg. 1.404(a)-5 and 7 after the year of termination and the accountants for the employer should explore this possibility.

[david rigby]

I'm not an accountant either, but it seems obvious that the 20K was not contributed for the 10/31/01 plan year since it was made after 7/15/02. Therefore, in order to deduct it in the 10/31/02 fiscal year, it has to be for the 10/31/02 plan year.

Was there a need for additional funding (plan termination in process)?