deminimus benefit

[thepensionmaven]

We are reviewing a deminimus benefit defined benefit plan for a sole proprietor, age 74.

The first year of the plan was 2013. An individual from an insurance company prepared the calcs for this individual. The TNC was 103% of the net Schedule C.

Net Schedule C $3,900 - TNC $40,000?

Isn't the deduction limited to the net Schedule C?

[Lou S.]

Yeah you can't deduct more than your income for schedule C employee.

But if I recall correctly the IRS doesn't impose the 10% penalty on non-deductible contributions anymore for self-employed if it is required to meet minimum funding.

[Andy the Actuary]

I sort of recall from years ago some analysis whereby a basis was established so that the employee would not be taxed on that part of the distribution attributable to after-tax contributions.

[Mike Preston]

ATA: Never heard of a legit argument for establishing basis.

Lou: Do you have a cite other than the non-deductible excise tax can be eliminated by making the election in 4972(c )(7)?

[Lou S.]

Mike I thought it was 4972©(4) that made them not subject to the excise tax. That is it for purposes of the excise tax it is "treated" as deductible if required under 412.

https://www.law.cornell.edu/uscode/text/26/4972

[Lou S.]

And I agree, I've never heard a good argument for establishing basis or carrying forward the deduction to future year.

[Andy the Actuary]

I will not argue this because it was not my contention. I wanted to share that attorney client about 5 years ago used the regulations in 1.72-17 and 1.72-17a as justification that a basis was created. Since to my knowledge he was not audited, he must have been right.