When is “sufficiency” contribution deductible for terminating DB plan?

[Guest YATPA]

- PYE 7/31

- Er FYE 12/31

- Plan term date 6/1/07 (falls within 8/1/06 – 7/31/07 PY)

- Plan is underfunded and employer planned to make final deposit to make sufficient once IRS FDL was received. FDL came last week.

- Sponsor will make the final deposit within next 30 days

- Pattern of deductions has been, contributions for the PY that ends in each FY (2005 contribution deducted on 2006 return, 2006 on 2007, etc.)

Would this final contribution be deductible for employer’s 2007 taxable year or can they deduct in 2008?

Thanks in advance for your responses!

[Mike Preston]

- PYE 7/31

- Er FYE 12/31

- Plan term date 6/1/07 (falls within 8/1/06 – 7/31/07 PY)

- Plan is underfunded and employer planned to make final deposit to make sufficient once IRS FDL was received. FDL came last week.

- Sponsor will make the final deposit within next 30 days

- Pattern of deductions has been, contributions for the PY that ends in each FY (2005 contribution deducted on 2006 return, 2006 on 2007, etc.)

Would this final contribution be deductible for employer's 2007 taxable year or can they deduct in 2008?

Thanks in advance for your responses!

The good folks at the national office of the IRS take the position that 412 stops when the plan is terminated. Field offices aren't so strict, but that can change at the drop of a hat. Would 162 then allow the deduction? Doubtful.

With 412 out of the picture, 404 is the only way to determine deductibility. There is an old and informal interpretation that says anything which doesn't fit neatly into 404's other provisions falls into the past service definition of 404 and becomes deductible over a 10 year period.

So, yes, it is deductible in theory. But the timing of the deduction is usually less than satisfactory.

[SoCalActuary]

Don't overlook 404(o)(5) for plans subject to PBGC.

If it is not a PBGC plan, then see Mike's comments above.

[John Feldt ERPA CPC QPA]

Okay, for dummies like me:

404(o) DEDUCTION LIMIT FOR SINGLE-EMPLOYER PLANS.

...

404(o)(5) SPECIAL RULE FOR TERMINATING PLANS. --In the case of a plan which, subject to section 4041 of the Employee Retirement Income Security Act of 1974, terminates during the plan year, the amount determined under paragraph (2) shall in no event be less than the amount required to make the plan sufficient for benefit liabilities (within the meaning of section 4041(d) of such Act).

1. Does this mean a plan subject to the PBGC gets an immediate deduction of the amount that is contributed to make the plan sufficient? (not required to deducted over 10 years)

2. If the plan is not subject to the PBGC, then the normal required contribution under 412 (or 430) applies up until the last plan year (the one with a plan term date), and any additional contribution made can only be deducted as fast as 10 years?

I've been thinking that 1 is Yes and 2 is Yes...

When I read Mike's comment that made me think the plan loses any immediate full deduction options for its last plan year for any amount that is above the 412 minimum...

[Mike Preston]

I think things have taken a detour.

SoCal, I think your cite is irrelevant to the timing of the OP's issue. That is dealing with increasing the deduction with respect to the year of plan termination. That isn't at issue here. The year of the plan termination is the year ending 7/07 and the amount determined with respect to that year, with or without a 404(o) bump, is deductible in calendar 2007. Calendar year 2008 is what the OP is asking about.

J4FKBC,

1. Yes, but it still applicable only to the year in question. It does not mean that you can make a contribution in a subsequent fiscal year and then deduct it.

2. Seems right.

I don't see where your final conclusion comes from, but it is not what I intended to convey.

[John Feldt ERPA CPC QPA]

okay, thanks for the clarification.

[Guest YATPA]

Thanks, everyone.

Yes, plan is a PBGC plan. Mike is correct, my question is whether the final deposit made in 2008 can be deducted on the employer's 2008 return or is it only deductible in 2007.

There's another complicating factor though - Employer is closing the business and 2008 will probably be the last year a tax return is filed. So no ability to deduct over 10 years.

[SoCalActuary]

Mike & I occasionally disagree, and this is one of those times.

My opinion is that 404(o)(5) operates for the year that you make a payment to bring the plan to PBGC sufficiency. Otherwise, it is meaningless in practical terms. You don't make final settlement payments in most terminating plans until the trust is about to close, and the plan still exists until the trust is closed. This is almost never the same tax year in which the resolution occurs.

Common sense is your guide here. The start of the termination process determines the "Termination Date", but the payment of the last benefit is the final termination date. (Use of CAPS was intentional.)

[Mike Preston]

Sometimes we disagree and sometimes we disagree strongly. My guess is that this is one of the stronger variations. I've been down this path with a number of folks from IRS national office and I can tell you that they take my position.

There is nothing impractical in the reg. If a plan terminates, the deductible amount for that year can pop up to the extent necessary to make the plan adequately funded.

I see nothing that extends that to future years.

But, I can agree to disagree if you can!

[SoCalActuary]

We agree to disagree.

Part of the problem we face is the issue of when a termination occurs.

It is not uncommon for the plan to issue a termination amendment, but have the final settlement and close of the trust one or more years later.

IRS stops the 412 measurements when the termination amendment becomes effective. We agree.

The final contribution to make the plan sufficient (assume PBGC applies for this example) might be two tax years later, because the trust still has assets and the benefits are not yet distributed.

404(o) does not depend on the maintenance of 412, in my opinion, so the final contribution gets deducted in the tax year paid.

[AndyH]

Look like Mr. Holland agrees with Mike. See Merlin's comments and quoted Q&A.

http://benefitslink.com/boards/index.php?s...&hl=Holland

[SoCalActuary]

Did any of you see any references in the prior discussion to PPA and 404(o)(5)? I did not.

Has anyone had plan where the IRS denied deduction to a final contribution to a PBGC plan since PPA?

Does anyone believe that the PBGC would accept this position, knowing it would keep employers from funding?

[AndyH]

Has anyone had any more recent experience with the issue of deductibility of employer contributions under 404(o)(5) after the year of termination?