Deductible Contribution in Year of Termination?

[Dougsbpc]

Have a 4 participant DB that terminated 12/31/2005. It is a PBGC covered plan and they would like to terminate as a standard termination. PVAB's are $2,700,000 and assets (after 2005 contribution) are $2,400,000. The company owner and his wife are entitled to 80% of the benefits. They wish to fund the difference (approx $300,000) now. We always thought that a contribution (in the year of termination) would be deductible. After all, it is a necessary business expense to make benefits whole in the pension plan. Why would it not be deductible?

The 100% owner could waive benefits if necessary but would prefer not to.

Thanks much.

[david rigby]

The simple approach is to ask what is the unfunded current liability under IRC 412.

[Ron Snyder]

Such terminal funding contribution is deductible within the limitations of section 404. If the corporation is ceasing business operations, the entire amount is currently deductible. If the amount is actuarially justified under section 412, it is also fully deductible. (Such treatment may require a change in actuarial funding method to accrued benefit cost method with end of year valuation date. Your actuary had better be familiar with these rules.) Otherwise the current deduction amount is limited to the 412 calculations with the balance treated as a 10-year amortization base for deduction purposes.

[AndyH]

I beg to differ. I think the deduction limit is the greater of the 412 or 404 deduction limit or the difference between "termination liability" and assets. This was an EGTRRA change. I have not found any meaningful difference between "termination liability" and the PVABs.