Deductible limit when an employer has both a DB and DC plan and at least one participant is covered by both plans

[Lori Foresz]

Hi,

I am researching the dedutible limit when an employer has both a DB and DC plan and at least one participant is covered by both plans. There seems to be a special rule that if the total DB and DC contribution is greater than 25% of pay, the excess amount can not be deducted. The problem is the the DB minimum funding requirement is greater than 25% of pay, and the DC plan is a safe harbor plan that has to make the safe harbor contribution. As I understand the special rule, the safe harbor contribution would not be deductible and an excise tax would apply for that year and EACH year thereafter until it is able to be deducted.

Does anyone know if there is some way around this? HELP.

Many thanks

[Appleby]

You are right…For the combined defined benefit and MPPP, the maximum deductible limit is the greater of the 25 % (for the MPPP) and the amount required to fund the defined benefit plan…as far as I know, there is no way around paying the 10% excise tax on the non-deductible required contribution to the MPPP…

[Lori Foresz]

Thanks.

The plan is a PSP, but I would presume the answer doesn't change because the safe harbor contribution is required to be made to the PSP. So, basically, unless the DB contribution is less than 25% of pay, the DC contribution is never deductible. That seems harsh, but I guess the IRS is not always kinder and friendlier.

Thanks

[Mike Preston]

Don't forget that 4972©(6) will generally excuse the situation you describe from the excise tax (although not from it being non-deductible in the first place).

[Lori Foresz]

Hi,

So it will excuse the excise tax? I am trying to find that without my code book.

I will search for it.

Many thanks

Lori

[david rigby]

Iis this what you mean? Section 653 of EGTRRA:

"SEC. 653. EXCISE TAX RELIEF FOR SOUND PENSION FUNDING.

(a) IN GENERAL- Subsection © of section 4972 (relating to nondeductible contributions) is amended by adding at the end the following new paragraph:

`(7) DEFINED BENEFIT PLAN EXCEPTION- In determining the amount of nondeductible contributions for any taxable year, an employer may elect for such year not to take into account any contributions to a defined benefit plan except to the extent that such contributions exceed the full-funding limitation (as defined in section 412©(7), determined without regard to subparagraph (A)(i)(I) thereof). For purposes of this paragraph, the deductible limits under section 404(a)(7) shall first be applied to amounts contributed to defined contribution plans and then to amounts described in this paragraph. If an employer makes an election under this paragraph for a taxable year, paragraph (6) shall not apply to such employer for such taxable year.'.

(b) EFFECTIVE DATE- The amendment made by this section shall apply to years beginning after December 31, 2001."

[Mike Preston]

I was referring to 4972©(6), but I think 4972©(7) might do the same thing for the fact pattern identified. You would have to run the numbers to be sure.

[david rigby]

IRC 4972©(6):

(6) Exceptions

In determining the amount of nondeductible contributions for any taxable year, there shall not be taken into account -

(A) contributions that would be deductible under section 404(a)(1)(D) if the plan had more than 100 participants if -

(i) the plan is covered under section 4021 of the Employee Retirement Income Security Act of 1974, and

(ii) the plan is terminated under section 4041(b) of such Act on or before the last day of the taxable year, and

(B) so much of the contributions to 1 or more defined contribution plans which are not deductible when contributed solely because of section 404(a)(7) as does not exceed the greater of -

(i) the amount of contributions not in excess of 6 percent of compensation (within the meaning of section 404(a)) paid or accrued (during the taxable year for which the contributions were made) to beneficiaries under the plans, or

(ii) the sum of -

(I) the amount of contributions described in section 401(m)(4)(A), plus

(II) the amount of contributions described in section 402(g)(3)(A).

If 1 or more defined benefit plans were taken into account in determining the amount allowable as a deduction under section 404 for contributions to any defined contribution plan, subparagraph (B) shall apply only if such defined benefit plans are described in section 404(a)(1)(D). For purposes of subparagraph (B), the deductible limits under section 404(a)(7) shall first be applied to amounts contributed to a defined benefit plan and then to amounts described in subparagraph (B).

[Mike Preston]

Isn't that the version that applies before 1/1/2002?

How's this?

(6) Exceptions

In determining the amount of nondeductible contributions for any taxable year, there shall not be taken into account -

(A) so much of the contributions to 1 or more defined contribution plans which are not deductible when contributed solely because of section 404(a)(7) as does not exceed the greater of -

(i) the amount of contributions not in excess of 6 percent of compensation (within the meaning of section 404(a) and as adjusted under section 404(a)(12)) paid or accrued (during the taxable year for which the contributions were made) to beneficiaries under the plans, or

(ii) the sum of -

(I) the amount of contributions described in section 401(m)(4)(A), plus

(II) the amount of contributions described in section 402(g)(3)(A), or

(B) so much of the contributions to a simple retirement account (within the meaing of section 408(p)) or a simple plan (within the meaning of section 401(k)(11)) which are not deductible when contributed solely because such contributions are not made in connection witha trade or business of the employer.

For purposes of subparagraph (A), the deductible limits under section 404(a)(7) shall first be applied to amounts contributed to a defined benefit plan and then to amounts described in subparagraph (A). Subparagraph (B) shall not apply to contributions made on behalf of the employer or a member of the employer's family (as defined in section 447©(1)).