Contribution to DB Plan in Excess of Maximum Deductible

[Guest Chaffee]

I've received mixed answers on this, so I wanted some extra opinions.

Plan has minimum (& maximum) funding requirement for Plan Year ended December 31, 2002 of $300,000. Company funded $400,000 in September 2003 (and also reported $400,000 on 2002 Schedule B). Additional $100,000 was not deducted for Tax Return.

Is there a 10% excise tax on top of the disallowed deduction?

Also, can the additional $100,000 be deducted on subsequent Tax Returns (even though already reported on previous Schedule B)?

[david rigby]

What amount was deducted, and when? Since the $400K was actually made in 2003, the sponsor has some flexibility in determining when to deduct. If the sponsor claimed a 2002 deduction of $400K, that would seem to exceed the IRC 404 decuctible limit for that year. Excise tax. Alternatively, the sponsor might deduct part of the $400K in 2002 and part in 2003.

BTW, I have assumed both the plan year and sponsor's fiscal year are CY.

[SoCalActuary]

From the facts you presented, you don't appear to have any problems.

You said the excess contribution was not deducted, so the funds were not in the trust before they were deductible and no excise tax.

You do need to assure that the next year funding has room for the deduction.

From the perspective of minimum funding standards, you get interest credit back to the beginning of the 2003 year by crediting the excess to 2002. That gives more FSA credit in case you need it.

[Blinky the 3-eyed Fish]

By deeming the $400,000 as being made for the 2002 plan year I am not sure if that in of itself requires you to recognize the contribution for excise tax purposes the same as if it was made during 2002. See 4972©(1). However, there is the EGTRRA added 4972©(7), which basically says that if your FFL is greater than $400,000, then no excise tax.

From the perspective of minimum funding standards, you get interest credit back to the beginning of the 2003 year by crediting the excess to 2002. That gives more FSA credit in case you need it.

SoCal, I don't agree with this statement. Since the $400,000 was recognized for 2002, there is going to be a $100,000 credit balance as of 12/31/02. Also there will be a $100,000 nondeductible contribution. There is no FSA interest credit on the contribution.

So Chaffee, the $100,000 can only be deducted in future years if there is enough spread between the minimum and maximum deductible contribution. For example, if 2003's minimum is $250,000 and the maximum is $330,000, then you could contribute $250,000, deduct $330,000 and have a $20,000 nondeductible contribution remaining.

[SoCalActuary]

The facts presented were:

payment of $400,000 was made and reported on FSA.

$100,000 was credit balance.

Deduction taken was $300,000, and $100,000 was not deducted.

No contribution was made before year end 2002, so no excise tax applies.

The funding for 2003 will show that $100,000 FSA balance, plus interest, is adjusted out of plan assets for determining 412 normal cost in 2003.

The 404 cost will show $100,000 of un-deducted contributions without interest, which is adjusted out of the plan assets for 404 normal cost.

Did I miss something?

[Blinky the 3-eyed Fish]

It must have been unclear to me what you were saying the first time because I agree with what you just said.

No contribution was made before year end 2002, so no excise tax applies.

Except that I think this blanket statement is debatable as I mentioned the 4972©(1) cite.