Contribution Deduction

[Dougsbpc]

Suppose you have a 2 participant DB plan with individual aggreagate funding. The participants are 50% partners in a partnership. One partner is somewhat older than the other. Both partners have the maximum plan salary for all years. The normal cost for partner A is $100,000 and the normal cost is $50,000 for partner B. Total Contribution $150,000.

The accountant wants to know the contribution breakdown for each partner. We generally provide the normal cost as above. However, it would probably be more equitable if the $150,000 were allocated based on accrued benefits. Is it acceptable to determine the deduction split this way?

Thanks much.

[SoCalActuary]

You could certainly use a unit credit funding method to allocate the costs internally between the partners, even tho it is not the same as used for 412 compliance.

How you allocate between the two is not highly regulated, so you could use the accrued present values.

The IRS might like you to adopt a uniform accounting policy. I would warn you that inconsistent treatment from year to year may cause a change in accounting method.

[david rigby]

The accountant wants to know the contribution breakdown for each partner.

This sounds like someone either does not understand the NC, or is trying to manipulate something. If you have given them the 100K and 50K, that is the answer. Sure, you can apportion the total some other way, as SoCal suggests, but why would you?

[Blinky the 3-eyed Fish]

One reason would be to recognize the potential inequity of apportioning costs on IA NC. It would be very easy for one of the partners to have askew costs versus the other doing it that way, and if you have ever dealt with partners, or multiple business owners, equality is paramount. It's like they are communists. Doing it on a PVAB basis is more equitable, although too not perfect if that pesky 417(e) ever affects the distribution amount.

[SoCalActuary]

A real taxation issue of partnerships is the allocation of pension costs between the partners. The question is very relevant every year for these entities.

Another issue is that the allocated pension costs are compared to the economic value of the benefit available. For DC plans, this is a trivial problem, but for DB plans the issues include over-funding, underfunding, past service grants, interest rate changes, etc.

For that reason, I like partnerships to use cash balance plan formulas.

[Guest ritchie]

"Communists"?

I'm a communist. Can you tell?