2 employers sharing the 404(a)(3) deduction limit

[Santo Gold]

I've run into a murky situation involving the 404(a)(3) deduction limit. The actual example is really confusing, so I'll try to just present the general question:

An individual owns 100% of company A and B, both of which are adopting employers of a Target Benefit plan. There are 2 employees plus the owner all 3 of which work and draw compensation from both companies.

Let's say that the total contribution required to fund the plan for 2004 is $100,000. Company A is responsible for $25,000 and Company B is responsible for $75,000.

But the problem is that the maxumum deductible contribution for Company B is only $70,000, while Company A's max deductible is $35,000.

Can Company B deposit (and deduct) the full $75,000 since they are being treated as a single employer under 404?

There seems to be a lack of regulations on this specific topic. ERISA Outline Book (2004 ed, pg 7.410) confirmed this, while stating that you "should" be able to take the higher deduction for Company B. Does anyone have other ideas on handling this situation?

Thanks

[mbozek]

This is an accounting question. I thought that if a consolidated return is filed then the deduction can be based on the maximum contribution for the controlled group.

[Blinky the 3-eyed Fish]

True that it's an accounting question but you will be hard-pressed to find accountants (or anyone else for that matter) who feel comfortable with the answer. Santo, I think you aren't going to find a better analysis than the one you have already read.

[Ron Snyder]

1) "Required to fund" the plan is a concept that does not generally apply to "stock bonus and profit sharing trusts" (other than 401(k)(11) required minimums, which are permitted in excess of the 25% limitation.

2) If this is a consolidated return, either entity can take the entire deduction.

3) If this is not a consolidated return, each employer has its own 25% limit. And since multiplication and addition are commutative, the overall 25% limit will be equal to the sum of the 2 individual 25% limits (and will still be equal to 25% of the combined compensations).

4) If this is a case where the 401(k)(11) required minimums are involved, they are still computed separately, and each entity's deduction is the greater of the 25% limit or the 401(k)(11) required minimums.

[E as in ERISA]

Even if two companies don't file a consolidated return (because they are not both C-Corps), there are still ways to "share" and allocate tax attributes. The example that comes to mine is where a tax exempt files a 990-T for taxable income and there is a taxable C-Corp subsidiary. They both attach schedules to the back of the returns showing how they share and allocate "tax attributes" -- like certain tax brackets, expensing of depreciable property, etc. I imagine that this is a tax attribute that they can share and allocate. Not one that is normally on the schedules. But possibly could be. Ask them how they report those other items.