First Year Plan Maximum Contribution

[Dougsbpc]

Suppose you have a new plan with a 12/31/10 year end. The contribution will be funded 3/15/2011. The maximum contribution is the target normal cost. However, interest is applied to the minimum contribution from 1/1/11-3/15/11.

Can the company contribute the target normal cost or must they contribute the amount with interest for the first year?

[Andy the Actuary]

The minimum appears to be always deductible (except for situations where the minimum exceeds earned income):

Sec. 404. Deduction for contributions of an employer to an

employees' trust or annuity plan and compensation under a

deferred-payment plan

(a) General rule

If contributions are paid by an employer to or under a stock

bonus, pension, profit-sharing, or annuity plan, or if compensation

is paid or accrued on account of any employee under a plan

deferring the receipt of such compensation, such contributions or

compensation shall not be deductible under this chapter; but, if

they would otherwise be deductible, they shall be deductible under

this section, subject, however, to the following limitations as to

the amounts deductible in any year:

(1) Pension trusts

(A) In general

In the taxable year when paid, if the contributions are paid

into a pension trust (other than a trust to which paragraph (3)

applies), and if such taxable year ends within or with a

taxable year of the trust for which the trust is exempt under

section 501(a) in the case of a defined benefit plan other

than a multiemployer plan, in an amount determined under

subsection (o), and in the case of any

other plan, in an amount determined as follows:

(i) the amount necessary to satisfy the minimum funding

standard provided by section 412(a) for plan years ending

within or with such taxable year (or for any prior plan

year), if such amount is greater than the amount determined

under clause (ii) or (iii) (whichever is applicable with

respect to the plan),

Sec. 412. Minimum funding standards

(a) Requirement to Meet Minimum Funding Standard.--

(1) In general.--A plan to which this section applies

shall satisfy the minimum funding standard applicable to the

plan for any plan year.

(2) Minimum funding standard.--For purposes of paragraph

(1), a plan shall be treated as satisfying the minimum funding

standard for a plan year if--

(A) in the case of a defined benefit plan which is

not a multiemployer plan, the employer makes

contributions to or under the plan for the plan year

which, in the aggregate, are not less than the minimum

required contribution determined under section 430 for

the plan for the plan year,

[Dougsbpc]

Thanks Andy

When the plan was set up they were so anxious to get going that they assured us the contribution would be funded as of December 31. So we gave them the target normal cost. Of course they changed their mind and will now fund by 3/15. We can go back and have them fund the contribution with interest, but it would be great if we did not have to. I will remind them of their original intention to fund as of December 31 but you know how sometimes clients develop amnesia over things like this.

It is interesting how the maximum contribution page from our admin system (latest update only) contains the following

at the bottom of the page:

Note: Interest that increases the minimum required contribution for

deposits made after the valuation date, MAY increase the Maximum

Deductible Contribution amount shown.

[JBones]

This question was posed in a workshop at the LA Benefits Conference last month. The facts were:

Val Date: 1/1/11

No Past Service Liability

Target Normal Cost: $60,000

At Risk Target Normal Cost: $62,000

Effective Rate is 6%

Date of Deposit: 9/15/2012

TNC with interest to 9/15/2012: $66,280

The question was asked, is the entire deductible limit $62,000 or $66,280. The IRS spokesperson stated that they have not worked on the actual 404 issue, but it is reasonable that a contribution that is required to be made, be deductible, therefore, the entire $66,280 would be deductible for the year.

To answer your question, they must always deposit the contribution with interest due, but based on the example above, the entire amount is deductible.

[Andy the Actuary]

As I thought about your problem, I considered what about if you could only deduct the minimum as determined 1/1/2010 as you were considering In such case, you could have deducted part of the 3/15 contribution in 2010 and part (the interest) in 2011. That's all fine and dandy but you would be trapped if the client advanced the entire contribution in 2010. It would still be interested adjusted from 1/1/2010 so now you would have an unsatisfactorily resolvable dilemma.

[Andy the Actuary]

This question was posed in a workshop at the LA Benefits Conference last month. The facts were:

Val Date: 1/1/11

No Past Service Liability

Target Normal Cost: $60,000

At Risk Target Normal Cost: $62,000

Effective Rate is 6%

Date of Deposit: 9/15/2012

TNC with interest to 9/15/2012: $66,280

The question was asked, is the entire deductible limit $62,000 or $66,280. The IRS spokesperson stated that they have not worked on the actual 404 issue, but it is reasonable that a contribution that is required to be made, be deductible, therefore, the entire $66,280 would be deductible for the year.

To answer your question, they must always deposit the contribution with interest due, but based on the example above, the entire amount is deductible.

So, we're in good shape so long as no one ever again poses this question and opens up the floor for a contradictory opinion!!!