New Plan - First Year Funding Inflexibility

[carrots]

Under PPA, once a new plan has been designed, there doesn't appear to be any first year funding flexibility, other than that caused by the timimg of contributions.

If using a BOY valuation date, the FT is $0 (415 $ limit, with no YOP). So, the cushion amount is $0.

So, the maximum contribution is equal to the minimum contribution (TNC), as adjusted for date of payment.

Comments, please!

For example, would it help to switch to EOY valuations?

[JAY21]

I'm assuming this is a small plan primarily for owner, if the owner has past employment years you could base the formula on years of service (vs. years of participation) and creat a FT at the BOY, and then get the cushion. However, as best I can tell if there is no technical correction bill to provide a cushion on normal cost then I think you may just be pushing the "low year" into year 2 as follows:

Assume Funding based upon Years of Service is enough to hit 1/10th of 415 $ limit at BOY; further assume 1/10th of 415 limit has a PV of 100k (ignore interest for 2nd year):

1st year:

Funding Target: 100k (special first year rule allows use of 1/10th of 415 limit)

Target Normal Cost: $0 (no add'l accruals since restricted to 1/10th of 415 limit; used in Funding Target)

Cushion: 50k

Max Contribution 150k (assume this is then made)

2nd year:

Funding Target: 100k (still only have 1/10th of 415 limit at BOY of 2nd year for past service)

Cushion: 50k

Assets: <150k>

Target Normal Cost: 100k (additional 1/10th of 415 lmit for 2nd year accrual).

Max Contribution: 100k

I'd like to be wrong on this so anyone please correct me if I am, but it seems to me that absent a technical correction bill there is going to be 1 lower than normal year on the max deduction. You choose, year 1 or year 2.

[Effen]

If you didn't credit past service and the AB at the BOY was $0, without technical corrections, your min=max.

[carrots]

For a new plan, even with past service credits, how can we get an FT at BOY?

Isn't the AB at BOY = $0, since the 415 $ limit is $0 at BOY?

Am I wrong in thinking that the first year 415 $ limit at BOY is equal to the regular limit, multiplied by zero years of participation divided by 10?

[JAY21]

It's my understanding there is a special rule for first year of plan that the 415 limit cannot be less than 1/10th of the 415 limit even on 1st day of plan year.

See IRC 415(b)(5)©; I think that's the reference for this.

[FAPInJax]

What about the situation where the funding target is zero and the initial year max and min are equal? Assume a BOY valuation and a final required contribution of 10,000. The client makes the contribution on 12/31/2008 of 10,600 and it is appropriately discounted to the valuation date using the effective interest rate of 6% (ignore the quarterly contributions issue as well - to try and make this as simple as possible). The deduction rules appear to limit the deduction to 10,000.

Any and all comments are welcome.

[carrots]

It's my understanding there is a special rule for first year of plan that the 415 limit cannot be less than 1/10th of the 415 limit even on 1st day of plan year.

See IRC 415(b)(5)©; I think that's the reference for this.

Excellent! Thanks for the reference!

[carrots]

What about the situation where the funding target is zero and the initial year max and min are equal? Assume a BOY valuation and a final required contribution of 10,000. The client makes the contribution on 12/31/2008 of 10,600 and it is appropriately discounted to the valuation date using the effective interest rate of 6% (ignore the quarterly contributions issue as well - to try and make this as simple as possible). The deduction rules appear to limit the deduction to 10,000.

Any and all comments are welcome.

IRC 404(o)(1)(B) allows the deduction of the minimum required contribution under IRC 430. That presumably includes the interest adjustment under IRC 430(j)(2).

[ScottR]

Under PPA, once a new plan has been designed, there doesn't appear to be any first year funding flexibility, other than that caused by the timimg of contributions.

If using a BOY valuation date, the FT is $0 (415 $ limit, with no YOP). So, the cushion amount is $0.

So, the maximum contribution is equal to the minimum contribution (TNC), as adjusted for date of payment.

Comments, please!

For example, would it help to switch to EOY valuations?

Isn't the TNC for 404 purposes based on the "at risk" assumptions? 404(o)(2)(B) If so, this would probably make the maximum contrib higher than the min.

[FAPInJax]

Well, the IRS has refused to 'cave' with respect to at-risk calculations being used for a plan that can never be subject to the at-risk calculations. Therefore, I would rather not hang my hat on that. I do not like the idea that the contribution (adjusted for interest) is required for minimum purposes and therefore is deductible under the 404 rules.

[ak2ary]

While the IRS may not have caved on at risk, the law is pretty clear that the deduction can based on the at risk amount ... and from a policy standpoint it makes sense since you would not want to limit a deduction to less than the termination liability.

It is not, on the other hand, absolutely clear that you get to deduct the interest on the minimum if you have a beginning of year val (although clearly you do for an end of year val). It is anticipated that if and when the IRS gets around to writing 404 regs they will make it clear that you can deduct the interest

[Mike Preston]

Frank, can you give us some background on your assertion that the IRS isn't "caving" on this issue? As Tom points out, I thought it was understood that the maximum is based on the at-risk assumptions.

[FAPInJax]

My understanding is that Jim Holland has stated several times during conferences and workshops that this is not set in stone.

I believe the argument would go something like this: The provision that everyone is reading is meant to apply to a plan which is potentially subject to the at-risk rules BUT is not currently at risk. They would be able to use the at-risk rules to put additional monies away moving there further away from potential issues.

They have refused to comment on 404 during discussions with them regarding unclear / not issued regulations.

[tymesup]

PPA was passed a mere two years ago. Let's give our friends in government a reasonable period to issue 404 regs, please.