Allocation of Contribution

[Pension RC]

A frozen defined benefit plan covers 8 participants, 4 of whom are partners in the ownership of the company. The partners would like to terminate the plan. Although it is underfunded, they would like to make a contribution to make the plan whole. For tax deduction purposes, how would the contribution be allocated? In partner situations, is the allocation of the deduction done pro-rata based upon the funding targets? PVABs? I have heard that it is possible to do it another way using theoretical reserves. Does anyone have more information about this method?

Thanks!

[Andy the Actuary]

I'm not a tax man but it would seem as if each partner first would be allocated an amount to bring his/her benefit up to his/her lump sum. Is there any reason why the expense for the other participants would be allocated differently from any other expense as outlined in their partnership agreement -- the same way the pension deduction was taken?

[My 2 cents]

This looks like more of a partnership expense issue than anything directly related to pension funding. If they spent a like amount on some other extraordinary expenditure (whether subject to depreciation or not), how would the expense be allocated under partnership rules? Is this something addressed in the legal partnership documents? As for taxation, assuming that the contribution needed to bring the plan to sufficiency was fully deductible in general, wouldn't the tax treatment just pass along that deductibility based on the allocation of the necessary contribution?

[Calavera]

The deduction should be allocated by their ownership, unless there is a special partnership agreement stating otherwise. I don't think there is a prescribed methodology, so any reasonable method should work. Whatever methodology they used in the past for deduction of contributions they should continue to do the same.

You can find more benefitslink discussions by searching for "partnership agreement".