Deduction For Contribution Equal to Unfunded Current Liability

[Guest merlin]

A plan's regular funding method is aggregate. For 2002 the eoy minimum normal cost is 32000. EAN FFL is 129000. The sponsor wants to contribute the full unfunded current liability

of 131000. Can he deduct the full 131000 under 404(a)(1)(D) as amended by EGTRRA 652,or his he limited by the FFL of129000? In either event what are the credits and charges to the funding standard acct for 2002? Must the funding method be changed to one that produces a range of contributions broad enough to accomodate the 32000 minimum and the 131000 (129000?) maximum?

[david rigby]

First things first. The charges and credits are what they are. Actual contibutions made are included (whether or not deducted). If the FFL determination does not calculate a FFC, then you don't need one. I see no reason to change the method for this reason.

It appears that the UCL is intended to override the FFL, both from a plain reading of the statute and from these three Q&A's from the Gray Book.

QUESTION 2002-3 Funding: Limit on Deductible Contribution to Unfunded Current Liability

EGTRRA extends the IRC 404(a)(1)(D) "Unfunded Current Liability" deduction to multiemployer plans and to plans that cover 100 or fewer participants. However, for plans covering 100 or fewer participants, unfunded current liability shall not include liabilities attributable to benefit increases to highly compensated employees from amendments made or effective (whichever is later) within the last 2 years.

1) When does the "last two years" begin?

2) Is a plan year of less than 12 months a "year" for "last two years" purposes?

3) Does the prohibition on reflecting recent amendments apply to multiemployer plans that cover 100 or fewer participants?

4) For this purpose, is the date on which a plan amendment is formally adopted the date it is “made”, or may an earlier date be considered the date an amendment is made if the plan is operated consistent with the amendment for amendments that reflect changes in the law or annual updates of IRC limits?

5) If an amendment is adopted under IRC 412©(8), is the date on which it is "made" deemed to be the start of the plan year for which it is treated as effective for IRC 412 purposes?

RESPONSE

1) Two years prior to the beginning of the plan year for which current liability is determined.

2) No, a short plan year is not a year for this purpose.

3) Yes.

4) An amendment is made on the date it is formally adopted. Annual cost of living increases in statutory limits such as those in IRC

§§401(a)(17) and 415(B) are not considered "amendments" for this purpose. No guidance was given as to whether changes made at the time of EGTRRA compliance would be considered "amendments" for this purpose.

5) No, for this purpose, the date the amendment is made is the date as of which the amendment is adopted.

QUESTION 1993-14 Special Unfunded Current Liability Funding Limit -- Various issues

The following questions relate to the special maximum deductible limit under §404(a)(1)(D) which is equal to the unfunded current liability:

(a) Are plan assets reduced by the credit balance in the funding standard account?

(B) Should the unfunded be projected to year-end?

© Does this calculation override the Full Funding Limitation? For example, the regular Full Funding Limitation is zero, but the Unfunded Current Liability is $60. Is the deductible limit $60?

RESPONSE

(a) No. Plan assets are only reduced by undeducted contributions.

(B) Yes. The unfunded current liability is projected to the end of the plan year. (See Question 11).

© Yes. The maximum deduction limit under §404(a)(1)(A), including the full funding limitation, does not apply to the deductibility of the unfunded current liability under §404(a)(1)(D). Therefore, in the example, $60 would be deductible.

QUESTION 2000-13 Funding: Adjustment for Undeducted Contribution in Unfunded Current Liability

A plan wants to use the maximum deductible limit under Code section 404(a)(1)(D) of 100% of the unfunded current liability. In determining the unfunded current liability, do you subtract from the assets any carryforwards under §404(a)(1)(E)?

RESPONSE

When calculating any component of the maximum deductible contribution under 404(a)(1) for a plan year, you must exclude from plan assets the amount of any employer contributions not yet deducted in prior plan years and carried forward under §404(a)(1)(E).

[Guest merlin]

Helpful, as always. Thank you.