Unfunded CL Deduction Limit for a New Plan

[Guest jody303]

Is the adoption of a new plan considered a plan amendment for purposes of the 2-year restriction on deducting the unfunded CL for HCE's, or can a plan deduct up to the total unfunded CL in its first plan year?

Thanks for all of your help!

[david rigby]

The only "guidance" I know of is from the 2002 GrayBook, which is referenced in this discussion:

http://benefitslink.com/boards/index.php?showtopic=24115

[Guest dsyrett]

I would check the above guidance but my thinking is that a new plan would be treated as a plan amendment. Otherwise what would prevent an existing DB plan sponsor from circumventing the 2 year rule by adopting a second plan?

[David MacLennan]

I think the only reasonable interpretation FROM AN IRS VIEWPOINT is that the plan adoption is considered a plan amendment. Although not directly applicable to 404, the 401a4 regs specifically state that the adoption of the plan is to be considered a plan amendment.

On the other hand, since the IRS has not issued any guidance, an aggressive position could be taken by the plan sponsor and the sponsor's CPA or tax advisor. Or is it aggressive, really? The common sense interpretation is that "amendment" is NOT the adoption of a plan - it is a mathematical-like abstraction to say amendment = adoption. Certainly the statute could have been more clear, and the IRS could issue regulations promptly. Is that the taxpayers' problem? Is it the taxpayers' role to comply with the so-called "spirit" of the law? Or, to interpret the Code to maximize government revenue? Is it the role of the retirement plan consultant to give the client the conservative answer as if it is the only option? I know how I would answer those questions . . .

The risk during an audit would be a possible disallowed deduction, late tax payment with interest and penalties, and excise taxes on the non-deductible contribution. This could involve a considerable amount of money, but the plan's qualification is not at risk.

[Guest Partly Cloudy]

I was at the small plan design session at the 2003 EA meeting and the speaker specifically said that the adoption is considered a plan amendment for this purpose. For example, a calender year plan effective 1/1/03 would not have the full Unf CL 404 limit available until 2005.

Since this small plan rule applies only to HCE's the Unf CL could be based on the NHCEs's Unf CL, but in my experience, probably because most of the plans I see do not grant past service credit, that amount never exceeds the deductible 412 amount in this kind of small plan situation.

[David MacLennan]

Partly Cloudy - Did the speaker at the 2003 EA Mtg have some justification for that conclusion? I was trying to say that it is not a black and white issue, and that most pension consultants / actuaries don't act as advocates for their clients in the fullest sense.

[Guest penman]

David - I was not disagreeing with you, just giving my 2 cents. I do not recall if there was some justification given by the speaker. I think your explanation makes sense.

[WDIK]

Okay penman, I give. Is Partly Cloudy your secret identity or alter ego?

[Guest penman]

It's my real name.

[AndyH]

I think he thought he was doubling his odds of being nominated for the best BenefitsLink user name. And to think I nominated his alter ego. I think.

[Guest jody303]

Thanks for the discussion, everyone. Clearly, we need more guidance in this area.

FYI, the link that pax provided was to a thread that also contained a post from Blinky on 4/15/04, which stated that "Jim Holland at the LA Benefits Conference said that the adoption of a plan was not an amendment for this purpose." I'd generally put more weight on Holland's comments than on the speaker at the EA meeting, without knowing who that speaker was. However, I appreciate the information provided by Partly Cloudy.

I agree with David that this is not a black and white issue and that we should give our clients the benefit of both sides.

Thanks again, for all of your posts.

[Guest penman]

The speaker was Larry Deutsch.

[Guest jody303]

Larry Deutsch? Uh oh... that tends to make it "cloudy" again, don't you think?

Thanks, penman.

[Blinky the 3-eyed Fish]

Mathematically, I find the whole issue largely moot. I haven't found there to be a significant additional amount available due to the UCL in the first 2 years over the minimum funding. And keep in mind these additional contribution are just effectively reducing future years' contributions, so if the plan has any lifespan, the moot stick gets brought out again.

[david rigby]

True, but short-term cash flow may be relevant.