404 Maximum deductions

[Gary]

We know that one of the 404 limits is the 412 minimum.

The question is:

1. Should the minimum funding under 412 as it applies to 404, include the credit balance or ignore the credit balance?

So for eg.

Say the minimum is 100,000 before application of the credit balance and the credit balance is 20,000, resulting in a minimum of 80,000. Assume that there have been no carryovers to date.

For purposes of 404 is the minimum max tax (i.e. the 412 override) equal to 100,000 or 80,000?

Thanks.

[david rigby]

I don't care for the phrasing in your last question, but the answer is 80K.

However, methinks there may be other facts not yet in evidence. Possible?

[flosfur]

Section 404(a)(a)(A)(i) reads - the amount necessary to satisfy the minimum funding standard provided by section 412(a) ......

In your example, the amount required to satisfy the minimum funding is $80k (not 100k), so the answer is $80k.

[Ron Snyder]

Your question is oversimplified because the definition of valuation assets is different for section 412 minimum calculations and for 404 tax deduction limits. Each calculation, therefore, is done separately as part of the valuation.

[Gary]

If there are no carryovers and the valuation assets are the market value wouldn't they be the same for 404 and 412?

And for 404, one of the overrides is the 412 amount as a minimum for maximum purposes. And my question addresses how the 412 should apply (with or without credit balance).

[Ron Snyder]

If there is a credit balance, as was hypothesized, there is a difference between the 404 assets and the 412 assets.

[Gary]

Regarding a credit balance.

At one time I believed that for the 412 calculation, plan assets s/b reduced by the credit balance.

However, based on the Sch B instructions and perhaps some other experiences, my understanding hsa been that plan assets are not adjusted for a credit balance for 412 purposes. Of course after the minimum calculation is completed the credit balance then serves as a reducing credit to the minimum funding.

So my current understanding is that the assets are not adjusted for the credit balance for both 412 and 404.

But I do believe that assets are reduced for 404 if there is a carryover.

[david rigby]

What is the funding method?

[Gary]

Individual aggregate.

[david rigby]

It is my understanding that, for purposes of deriving the Normal Cost, any variation of the Agg or IA method should "adjust" the 412 assets for the Credit Balance. (The 412 assets also could differ from the 404 assets if there are non-deducted contributions.) The result is that the 412 NC will be greater than the 404 NC. However, the 412 contribution is then determined by subtracting the credit balance, producing a 412 contribution that is less than the 404 contribution. Ignoring any issues for AFC, interest on late quarterly contributions, full funding, etc.

The Schedule B instructions for lines 1(b)(1) and 1(b)(2) state that no adjustment should be made for the Credit Balance. This is not defining the method, only the entry on the form. In general, the Schedule B is concerned only with 412, not 404.

[Blinky the 3-eyed Fish]

I agree with pax. Read Rev. Proc. 2000-40 for a description on what causes a reduction in the assets for the IA funding method. It is just talking about 412.