New Plan - Different Tax and Plan Years

[SRM]

Any problem with a plan sponsor deducting two years worth of minimum funding contributions in a single tax year based upon the following?

Election to deduct contributions for plan year beginning during tax year

Plan adopted 5/15/07

First Plan Year 5/31/06 - 5/30/07

Second Plan Year 5/31/07 - 5/31/08

Tax Year 6/1/06 - 5/31/07

Assume 100K minimum funding requirement for PYE 5/30/07 and 100K minimum funding requirement for PYE 5/30/08 (ignore interest for simplicity).

Assume 100K contribution deposit on 6/1/07 for PYE 5/30/07 and 100K contribution deposit on 6/2/07 for PYE 5/30/08.

Can the 200K be deducted for the Tax Year Ending 5/31/07 considering the first 100K as includible contributions (not deductible for Tax Year Ending 5/31/06 solely due to timing of contribution)?

[Gary]

From your example, it appears that both the plan year and the tax year are the same.

In any event, I don't bellieve they can deduct 200k based on your example for 5/31/07.

The only way they can deduct 200k for 5/31/07 is if the first plan year supports such a large deduction, as opposed to using two plan years funding requirement to accomplish the 200k deduction.

[mwyatt]

Actually Gary the py and fy differ (old insurance agent trick 5/31-5/30).

[Gary]

Then for tax deduction purposes the 5/31/08 (perhaps s/b 5/30/08) valuation (2nd plan year end) would be based on $0 assets for 404 purposes since no deduction for 5/31/06 tax year.

And if a deduction of 200k can be accomodated based on $0 assets for the second plan year then I see no problem with a 200k deduction for the 5/31/07 tax year.

The only quirky aspect is that the first plan year is 364 days and the second plan year is 366 days or more than a year. The second plan year s/ probably be from 5/31/07 to 5/30/08 and so on.

[david rigby]

Perhaps this is the reference needed: IRS Reg. 1.404(a)-14©:

© Use of plan in determining deductible limit for employer's taxable year.

Although the deductible limit applies for an employer's taxable year, the deductible limit is determined on the basis of a plan year. If the employer's taxable year coincides with the plan year, the deductible limit for the taxable year is the deductible limit for the plan year that coincides with that year. If the employer's taxable year does not coincide with the plan year, the deductible limit under section 404(a)(1)(A) (i), (ii), or (iii) for a given taxable year of the employer is one of the following alternatives:

(1) The deductible limit determined for the plan year commencing within the taxable year.

(2) The deductible limit determined for the plan year ending within the taxable year, or

(3) A weighted average of alternatives (1) and (2). Such an average may be based, for example, upon the number of months of each plan year falling within the taxable year.

The employer must use the same alternative for each taxable year unless consent to change is obtained from the Commissioner under section 446 (e).