How much is deductible

[katieinny]

One-man business has a DB plan. For the current year, the actuary says you can contribute from zero to $150,000. To me, that means the plan must be fully funded, so the guy doesn't have to put anything in this year. But let's say he put's in $50,000. Can he deduct the $50,000, or does the fact that the minimum amount is zero mean that he can't deduct anything?

[John Feldt ERPA CPC QPA]

How much is that same employer contributing and deducting for their DC plan, if any, for that same tax-year?

[david rigby]

To me, that means the plan must be fully funded, so the guy doesn't have to put anything in this year.

A zero minimum contribution is not equivalent to "fully funded".

For example, there could be a credit balance that offsets other required charges.

[Andy the Actuary]

Your conclusion about fully funded while it sounds logical may not be the case. Deductibility laws permit deducting additional amounts. Apart from contributions exceeding any statutory limits, which is what J4FKBC was getting at, the bigger picture is how close is the Plan to providing maximum statutory benefits upon Plan termination? The laws severely penalize plan sponsors if their plan terminates with assets in excess of the maximum permissible amount (which is not an easy or static calculation).

[katieinny]

Good grief, I was hoping this was an easy question. To answer J4FKBC, the sole proprietor is a participant in his "main" employer's plan, but the only plan for his side business is the DB. To answer David Rigby, I don't know if the plan has a credit balance and other required charges. Relating to Andy the Actuary's comment, who is responsible for determining what the maximum statutory benefits are? Wouldn't that be the actuary?

I guess what Andy is saying is that if a $50,000 contribution (or whatever the amount is) will bring the plan up to (but not over) the maximum statutory benefit, he can deduct the full $50,000?

[rcline46]

Under PPA there is almost always a range of deductible contributions. No reputable actuary would provide a range which includes non-deductible amounts.

However, only the accountant can determine if the amount is actually deductible. For instance, you cannot deduct more than the net earned income for the sole prop. Therefore, under the plan the law would allow a contribution of $150,000 which could be deducted. If the net earned income (before contribution of course) were only $95,000, then the sole prop could only deduct the $95,000, and should not deposit more than $95,000.

[katieinny]

But the accountant isn't going to know what the maximum statutory benefits are, is he? I guess what you're saying is the the actuary comes up with the range ($0 -- $150,000 in this case), and the then the accountant says "your Sch C only shows $35,000, so you can't contribute more than that." But then, according to Andy, the maximum statutory benefit needs to be determined, right?

[david rigby]

katieinny,

you have grasped the essence of the other comments.

One minor clarification: Andy's comment refers to the algebraic possibility that making the maximum deductible contribution could result in a total asset pool that exceeds what the plan could pay out (under either the current plan provisions or under the IRC 415 maximum, as appropriate). That possibility does not limit the deductibility, but is a caution for practical reasons.

[Effen]

Just to further clarify what David is saying, the funding rules currently in place allow a plan sponsor to contribute and deduct (if otherwise permitted) an amount that would in essance result in the plan being 150% funded.

Also, as a point of confusion, contributing the minimum required contribution is generally not sufficient to ensure the plan is 100% funded.

Contributing the minimum ($0) does not mean the plan is 100% funded and contributing the maximum ($150) would probably result in the plan being overfunded by approximatley 50% (ie:150% funded). Overfunding might make sense if the client wants to prefund for the future, but wouldn't make sense if the plan is nearing its end or benefits were frozen.

The large range provides employers with flexibility to fund when times are good, and not be overly burdensom when times are bad (I know, lots of screaming in the back ground, but we are talking theory....)

This should be a consulting opportunity for your actuary and if he/she needs to explain how the numbers work for your plan. You need to understand the implications of the contribution and only your actuary can help you. If he/she can't/won't, find one that will.

[katieinny]

Ahh.... yes, that helps. Thanks for the clarification.