Deduct contribution in 2012 that is deposited in 2011?

[RobN]

Client wants to deposit set amount now and use whatever amount that is in excess over the minimum required amount for 2011 (undetermined at this time) towards any 2012 minimum required contribution. Doable?

Assume it fits within the deductible range permitted for 2011 & 2012.

[Andy the Actuary]

Certainly, provided you're talking about a defined benefit plan and

(A-PFB)/FT all determined as of 1/1/2011 >=80%

[SoCalActuary]

WHOA!

Did your post imply that you are contributing in 2011 and deducting in 2012?

For minimum funding, you can over-contribute in 2011, creating an addition to your Pre-Funding Balance. As AtA noted, you can use the PFB from 2011 to meet 2012 minimum funding requirements, provided you meet the 80% funding test in 2011.

But the deduction issue is handled differently.

You deduct in 2011 the full contribution, unless it exceeds the maximum allowed. Any amount in excess of 2011 limits gets carried over to 2012 for deduction purposes.

There is some difference of opinion - some say you can carry deductions forward indefinitely, others contend that you can only use one year of carryforward. I generally belive that you can carry non-deductible amounts forward into multiple future years, as the IRS indicated under old pre-PPA rules for clients who funded their plan termination liabilities up to 10 future years.

Certainly, you can deduct any amount paid in the year to the extent it brings the funding target percentage up to 100%. If you have not amended the benefits for HCE's, you can probably deduct contributions up to 150% of funding target. That's usually a lot of money, unless your plan does not have any eligible past service benefits to use the cushion.

There is also a wrinkle in the PPA rules that over-funding a DB plan appears to be exempt from excise tax under specific circumstances.

But those are a number of qualifiers to your question. What was your goal?

[RobN]

The clients goal is to put money in now, in 2011, while he has the cash and use the excess to go towards funding the 2012 contribution. Included in his scenario is deducting the contribution in 2012.

I didn't think he could do it, but wanted to check here.

However, thinking about it, in this particular case he would be creating a large enough PFB to offset the minimum required contribution for 2012, so that part of his goal is accomplished. He'll just have to deduct the entire thing for 2011, as it'll be well below the maximum permitted contribution for 2011.

Thanks!

[david rigby]

If he has the cash now, but wants to wait until next year for the deduction, he'll have to put the cash aside (ie, not in the plan's trust) and make the contribution in after December 31.

[mbozek]

Client wants to deposit set amount now and use whatever amount that is in excess over the minimum required amount for 2011 (undetermined at this time) towards any 2012 minimum required contribution. Doable?

Assume it fits within the deductible range permitted for 2011 & 2012.

Under IRC 404(a)(6) all contributions are deductable on a cash basis for the tax year in which the contribution is made or for contributions made no later than the date for filing the tax return for the tax year. Rev Rul 76-28. According to Pub 560 the deductible amount cannot exceed the plan's unfunded liability.

Excess non deductible contributions can be carried over and deducted in a subsequent tax year but will be subect to the 10% penalty tax on non deductible contributions. Excess contribution tax can be eliminated by withdrawing the excess amounts before the date for filing the tax return or deduction of the excess contributions in a later year.

If the client contributes the funds in 2011 the only way they will be deductible in 2012 is if the contrbutions exceed the unfundied liability in 2011 but the excess will be subject to the 10% penaly tax in 2011. See Form 5330. If the client contributes all the funds at the beginning of 2012 the client can deduct the maximum deduction permited for 2011 and the excess can be deducted on the 2012 return without any excess contributions tax.

[SoCalActuary]

Client wants to deposit set amount now and use whatever amount that is in excess over the minimum required amount for 2011 (undetermined at this time) towards any 2012 minimum required contribution. Doable?

Assume it fits within the deductible range permitted for 2011 & 2012.

Under IRC 404(a)(6) all contributions are deductable on a cash basis for the tax year in which the contribution is made or for contributions made no later than the date for filing the tax return for the tax year. Rev Rul 76-28. According to Pub 560 the deductible amount cannot exceed the plan's unfunded liability.

Excess non deductible contributions can be carried over and deducted in a subsequent tax year but will be subect to the 10% penalty tax on non deductible contributions. Excess contribution tax can be eliminated by withdrawing the excess amounts before the date for filing the tax return or deduction of the excess contributions in a later year.

If the client contributes the funds in 2011 the only way they will be deductible in 2012 is if the contrbutions exceed the unfundied liability in 2011 but the excess will be subject to the 10% penaly tax in 2011. See Form 5330. If the client contributes all the funds at the beginning of 2012 the client can deduct the maximum deduction permited for 2011 and the excess can be deducted on the 2012 return without any excess contributions tax.

I have two disagreements with your comment.

The rules of 404 have changed significantly since 76-28, and your Pub 560 is also obsolete, because 150% of FT is now used.

There is also a quirk in PPA that allows an excess contribution to a DB plan without the 10% over-funding excise tax.