Nondeductible contribution in plan/plan termination

[Guest saeissler]

A one participant plan is terminating effective in 2005. The assets will be distributed in 2006 or 2007. A nondeductible contribution of $30,000 was made in 2004. As of 12/31/2005: the assets are $874,000; the PVAB is $934,879 using GATT rate; the RPA current liability, using the lowest rate, is $816,873.

Therefore no contribution can be made for 2005, even though assets are not sufficient to pay out benefits.

Question 1: If all of the assets are distributed before the 2005 funding deadline of 9/15/06, can the employer avoid paying an excise tax again for 2006?

Question 2: Can the client deduct the $30,000 over a 10 year period as a past service cost?

[Guest Ron Sevcik]

Before answering your questions, I have a question. I am trying to understand why there is such a large difference between the GATT liability and the RPA liability. Are you using 4.59% (assuming this is a calendar year plan) for the RPA liability? Remember, for 2004 and 2005 you can use the "old" current liability interest rates for determing the maximum tax deduction.

[Guest saeissler]

I used 4.65% and 1994 GAR Proj 2002 for the $934,879 (GATT) and 4.59% 83GAMU per RR95-28 for the $816,873 (RPA). (Actually the $816,873 should be $844,293 if I am comparing them both at the beginning of the year and I would need to make an actuarial adjustment to compare them at year end.) But the major difference remains, because of the different mortality tables, and thus my problem remains. The APR is 141.9926 for GATT and 128.2341 for RPA at age 66.

[Guest Ron Sevcik]

I forgot to take into account that RPA still uses the sex distinct tables, thus you can have the large difference you have calculated.

As for the $30,000, I believe you must still file a 5330 for 2005. I believe the $30,000 does not become a deduction until the assets are distributed, which will be in 2006. Whether before or after 9/15/06 doesn't matter. You would then deduct the $30,000 (and any additional contribution made at the time of distribution) over the tax years 2006 to 2015 at 10% per year.