Deductible Contributions

[Guest guppy]

EA2 question for y'all:

Plan Year is Calendar Year (assume same fiscal year for this question)

Company makes contribution for 2002 play year on 9/15/2003

Contribution exceeds deductible limit for 2002 (even if based on UCL at lowest interest rate)

Company deducts up to limit for 2002, and the rest in 2003 (less than 2003 max)

Question 1: is there any excise tax due?

Question 2: are 404 assets adjusted by this "carry forward" for 1/1/03 val

Thanks in advance!

[david rigby]

1. No excise tax unless the contribution exceeds that which could be deducted. Facts indicate that the "excess" will be considered a contribution in and for the 2003 plan year, and deducted in the 2003 fiscal year.

2. 404 assets at 1/1/2003 will exclude any contribution not already deducted. 412 assets will include any portion of this acrued contribution which is included in the 12/31/2002 funding standard account.

[Guest guppy]

Thanks, pax.

Like most EA questions, it was asked poorly What I'm trying to get at here frankly is:

Can a contribution be made for the 2002 plan year, but deducted in 2003?

And if it can, is said contribution treated as a "carryover" in the 2003 404 calcs?

[Blinky the 3-eyed Fish]

Your last post does not jive with the first. No one would make a contribution for 2002 in 2003 if it's in excess of the deductible limit when the 2003 contribution could just be treated for 2003. Can you re-post the facts with more detail about when the contribution is actually made and when the deductions are taken?

[Guest guppy]

OK, more details:

2002 val results:

Aggregate NC w/ int to 12/31 (assume $0 CB) = 100,000

CL = 3,500,000

AVA = 3,500,000

UCL = 0

FCLP = 100%

The min = max is therefore 100,000.

Client puts in 100,000 on 12/31.

2003 val results:

Again, Aggregate NC w/ int to 12/31 (assume $0 CB) = 100,000

CL = 3,700,000

AVA = 3,200,000 (including 100,000 contribution)

UCL = 500,000

FCLP = 86%

The max for 2003 is UCL = 500,000

Funding strategy: client wants to put in additional 130,000 for 2002 by 9/15/03 to get FCLP to 90%.

This contribution exceeds the deductible limit for 2002, therefore will be deducted in 2003.

Assume corporate tax return for 2002 is not filed by the contribution date. Now,

Is the 130,000 subject to excise tax? and

Is it exclued from 404 assets for 2003 valuation (ie. 404 AVA = 3,330,000 - 130,000 = 3,200,000 so 2003 deductible limit is still 500,000)?

I believe the contribution CAN be made for 2002 but deducted in 2003 (without penalty). If you disagree, what about a situation where the corporate tax return for 2002 has already been filed (say there was no extension)? Then it HAS to be deducted in 2003, no?

I apologize if I'm making this more confusing than it needs to be. Thanks, everybody.

[MGB]

Under 412 and 404, it is possible to contribute to 412 in 2002 and deduct under 404 for 2003, so that you will not incur a carryover. In fact, as you state at the beginning, this is a classic EA-2 question.

HOWEVER, there is a non-pension tax issue that most actuaries are unaware of. That is known as a "tax accounting method." You are not allowed to change your tax accounting method without prior approval from the IRS. In the normal course of changing a tax accounting method, they make you go back to prior years and refigure your taxes, as if you had always used the new method (this is similar to the approach for changes in GAAP accounting methods under APB 20). I doubt a recalculation would apply in this situation.

In the past, I assume they have always deducted in X the contribution made in X+1 that has been designated for the X year. If you change this pattern, you have changed the tax accounting method. Of course, then you are in the position of probably wanting to change back to the old method in the following years, which creates a new issue.

If you do not go through the filing for a tax accounting method change, you could very well be open for a problem under an audit. Of course, the only problem would be that the contribution gets reallocated to X and the 10% excise tax applies for one year and deducted in X+1. So, the only difference is the excise tax (plus interest and penalties if this is paid late).

There are PLRs on this subject (most recent ones have focused on contributions to multiemployer plans).

[Guest guppy]

MGB, thanks - just wanted confirmation of what I THOUGHT was the right answer and now I have it.

As for your "tax accounting method" concern, my client's exact pattern is to deduct an additional contribution in the next tax year exactly once every X years (X to be determined next time they want to do it). So they have one more freebie!

Just kidding of course. However, I think you are probably right that most actuaries are unaware of this.

[david rigby]

However, I think you are probably right that most actuaries are unaware of this.

There is a difference between "unaware" and "don't want to know".

[AndyH]

Does this preclude the use of flip flop funding with respect to maintaing a DB and an MP? (Not that I would ever advocate it but some do).