PPA maximum deduction

[drakecohen]

One person plan - corporation

Sole participant at 415 high-3-year salary limit and not accruing more.

12/31/08 Funding Target: $1,000,000

2008 TNC = $0

Trust assets also $1,000,000

Under PPA the minimum is obviously $0 but is the maximum

deductible contribution $500,000? - the cushion amount?

[mwyatt]

You do have to take into account the 2-year (actually 3) lookback on amendments including COLA, but the simple answer is that you do indeed have the ability to deduct the $500k. Of course you may want to consider that this is money down the tubes if you're creating overfunding over the 415 limit (but after 2008 we're probably not looking at too many overfunded plans).

[drakecohen]

You do have to take into account the 2-year (actually 3) lookback on amendments including COLA, but the simple answer is that you do indeed have the ability to deduct the $500k. Of course you may want to consider that this is money down the tubes if you're creating overfunding over the 415 limit (but after 2008 we're probably not looking at too many overfunded plans).

Thanks, that's what it looked like to me too. But now I have a practical business question (possibly litigation related).

I have this real life situation though the numbers are bigger and it's husband/wife. They're both past retirement age. If they put the money they can deduct in ($1.3 million actually) then, barring another stock plunge, they're not likely to be able to take it all out without penalty. I'm very hesitant to just come out with that big contribution number to them now.

What are people out there doing?

[mwyatt]

Report the number, but then also report what number can be put w/o exceeding the 415 limits, coupled with an analysis of excise taxes due on reversion. The 50% excise tax usually would dissuade them from short-term deferral of taxes.

[david rigby]

Would the addition of a PS plan help any?

[Mike Preston]

As a qualified replacement plan when the plan is terminated with excess assets? Why, yes, it would!

[mwyatt]

Is certainly an option, but only problem is that it only brings the excess down; also when you have older owner participants, remember that you're going to need income in future years to draw down (although the EGTRRA 100% switch certainly helps that case) the allocated funds.

[mwyatt]

For some reason I can only report myself for abuse rather than edit the post. In your situation, you have h/w past NRA looking to contribute $1.3m past the 415 limit. Not sure that is doable, since you have to have the transfer allocated after 7 years (and they may not have future income). Certainly couldn't move the full $1.3 and allocate, so think the 20% excise tax that would result would most likely negate the tax deduction in the first place.

[david rigby]

Have I misread something? What about a PS plan for a pre-ret contribution/deduction?

Sure it's not close to $1MM+, but it's more than zero.

[drakecohen]

Excess assets later is a separate issue and when that hits for everybody maybe we can ASPPA to lobby for relief then.

For 2008 when the accountant asks what the maximum deductible contribution is for this plan I'm looking at telling him $1.3 million even though that's all excess assets. Accountants are an odd lot. If you give them a number they tend to move on without a predisposition to chat about it.

So is 150% the new 100% for full funding?

I expect this is a fairly universal issue for small plans but I haven't seen much discussion on it (though it might have something to do with me not being able to get on the COPA/ASPPA site or PIX, if that still exists).

[mwyatt]

If these guys are post NRA, probably winding down (so the successor PS plan w/ the excess transfer route may not entirely work), I wouldn't want to be the one two years from now explaining that their deduction at best faces a 20% excise tax (plus tax on reversions) or worst case 50% excise tax. I'd check my E&O before proceeding (unless they place the money with Bernie Madoff's kids).

[Mike Preston]

The precise question was whether it would help *ANY*.

[mwyatt]

As an aside, the post reply option screen seems to be overrun with smilies.

Think the issue here is timing. Getting a deduction only to give it up in a year or two generally doesn't make a tremendous amount of sense, although guess you have to defer to the accountant on that issue.

[tymesup]

Don't forget to mention that while the maximum lump sum under 415 can be calculated using 5.5%, the final lump sum can not be. If interest rates go up, the plan may already be overfunded.

[Mike Preston]

"can not" is a strong phrase. A simple amendment would allow it.