430 Minimum Contribution w-Prefunded Balance

[Rob P]

I am doing a 2009 contribution projection for a sole-prop. In 2008 the sponsor contributed about $170K more than the required minimum, as such I have a pre-funded balance in 2009. My preliminary 2009 calculations show a required minimum contribution of $130K, but I still have the pre-funded balance of $170k (adjusted with interest). The software that we're using seems to have ignored the pre-funded balance (other than adjusting the assets).

Question: Is it required the any pre-funded balance reduce the year's required minimum contribution?

For this particular case, the sole-prop is not anticipating any earned income for 2009, but still wants to make a contribution. It was my understanding that any contribution made in excess of the required minimum would be subject to a 10% excise tax penalty, so if the current required minimum of $125K (according to the software) must be reduced by the pre-funded balance, then I really don't have a required minimim and any contribution would be subject to an excise tax penalty.

Any input is appreciated.

[david rigby]

First, you are not required to have a PFB. It's optional. See IRC 430(f)(1)(A).

Second, you determine your "net assets" by subtracting the PFB to the extent it will be used to offset in your minimum. See IRC 430(f)(4)(A).

There is a 10% excise tax for contributions more than the deductible limit. See IRC 4972. Do you have a cite for excise tax on amounts greater than the minimum?

[tymesup]

Third, if your sole proprietor has no earned income, he can't take a deduction. If he can't take a deduction, why would he want to make a contribution?

[YankeeFan]

First, you are not required to have a PFB. It's optional. See IRC 430(f)(1)(A).

Second, you determine your "net assets" by subtracting the PFB to the extent it will be used to offset in your minimum. See IRC 430(f)(4)(A).

There is a 10% excise tax for contributions more than the deductible limit. See IRC 4972. Do you have a cite for excise tax on amounts greater than the minimum?

I don't have a cite but in the case of a sole proprietor with no earned income for the year, contributions in excess of earned income are not deductible even if the contributions are required to satisfy minimum funding. In this case, there is an exemption from the 10% excise tax. If a sole proprietor is required to make a contribution that is in excess of earned income in order to avoid a funding deficiency, the excess will not be considered in determining nondeductible contributions.

In the event the contribution exceeds the required minimum contribution, the amount in excess of the required minimum contribution would be subject to a 10% excise tax.

Does anyone disagree with my understanding?

[Mike Preston]

Second, you determine your "net assets" by subtracting the PFB to the extent it will be used to offset in your minimum. See IRC 430(f)(4)(A).

Only for purposes of determining the shortfall amortization base. For other purposes, such as MRC (which is what is being discussed in this thread), funding shortfall, and FTAP the value of plan assets is always reduced by the PFB (and the COB, too).

There is a 10% excise tax for contributions more than the deductible limit. See IRC 4972. Do you have a cite for excise tax on amounts greater than the minimum?

Note that the language of 4972©(7) clearly (at least it is clear if you just read the Code, itself, as it exists, and ignore the history of what it has previously said) eliminates the excise tax on non-deductible contributions made to defined benefit plans (other than multi-employer plans). Caveat: when this was pointed out to somebody at the IRS who will remain nameless they were of the opinion that 4972©(7) couldn't possibly say that, and believed that interpreting as saying that would be an unreasonable interpretation.