contribute more than max deductible for a plan year?

[figure 8]

Say we have a DB/DC combo (non-PBGC).

Plan comp is $1,000,000.

DC allocations are $100,000 (have exceeded 6% of comp). As a result, the DB plan will be limited to a contribution of $210,000 (31% of $1,000,000 minus $100k).

However, 25% of comp = $250k. And the DB minimum required contribution is $230k. Since the DB MRC does not exceed 25% of comp, the deductible limit still stands at $210,000.

2014 is the deduction year we're looking at. Say the plan contributed $200k during 2014 for the DB plan. And in January 2015, $50k was contributed.

As stated above, the max deduction for the DB for 2014 is $210k. So they can deduct the $200k contributed in 2014 and $10k of the January 2015 contribution as well. The remaining $40k will be deducted from 2015 taxes. But this won't meet the 2014 MRC.

So here's what I'm wondering...

For plan purposes, can they apply the full $250k in contributions for the 2014 plan year, so that the minimum required contribution is met? In this case, the SB would show $250k contributed for 2014, but the maximum deductible for the year was only $210k. But as long as they don't deduct more than $210k for 2014, all should be good, right? This seems like an obvious, yes it's okay - but I just want to make sure I'm not missing something here. Thanks!

[Andy the Actuary]

Assuming calendar year, understanding is contribution made in 2015 cannot be deducted in year 2015 if claimed on 2014 SB.

[figure 8]

I think they're fine to deduct from a timing perspective. This would be option c below...

Gray Book 2011-7

Funding: Grace Period Contributions

A company has a calendar taxable year and sponsors a pension plan with a calendar plan year. Which of the following combinations are acceptable for a contribution made during the 2010 §404 contribution grace period (January 1, 2011 to September 15, 2011)?

a) Deduct contribution in 2010, reflect on 2010 Schedule SB.

b) Deduct contribution in 2010, reflect on 2011 Schedule SB.

c) Deduct contribution in 2011, reflect on 2010 Schedule SB.

d) Deduct contribution in 2011, reflect on 2011 Schedule SB.

RESPONSE

a), c), and d) are acceptable. IRC §404(a)(6) deems a contribution made after the last day of a taxable year to be made on the last day of a taxable year if the payment is made on account of such taxable year. A contribution is considered to be on account of the 2011 plan year when reported on the 2011 Schedule SB and thus cannot be deducted on the sponsor’s 2010 tax return.

I'm just wondering if it matters that the 2014 maximum deductible limit is exceeded when you look at the 2014 SB contributions. Should be okay as long as they only actually deduct up to the limit, right?

[Andy the Actuary]

Sorry, my confusion. Rule is (as you reported) cannot deduct for an earlier year than the Schedule SB year.

[figure 8]

No worries.

I think I'm just thrown cause I don't recall having this situation come up before. I don't see why it shouldn't be okay though.

[figure 8]

I think the heart of the matter is really one question - what is a maximum deductible contribution? Is it simply the largest amount that can be deducted for a given tax year, or does it also define the largest amount that can be contributed towards a given plan year?

It's called a maximum deductible contribution. I think there's only a limit on what can be deducted for a given tax year. Which means there is no limit as to what can be contributed for a given plan year (though obviously there are repercussions if you exceed the deductible limit).

I guess I've never thought about there technically being no limit as to what can be contributed for a given plan year, but I can't think of any reason why it's not true.

Anyone disagree with these thoughts?

[Mike Preston]

This came up years ago and the IRS representative said that one concern would be an exclusive benefit violation. I would think it would need to be egregious before the IRS would press such an issue. But I suppose if the plan sponsor contributed 4 times the PVB in anticipation of fully funding benefits for a future acquisition it might run afoul of the exclusive benefit rules.

Getting to your initial issue, the problem is that we don't have any 404 regs so anything you do, even if it faithfully matches the result described in a gray book question, has to be sprinkled with a bit of caution.

[figure 8]

Thanks, Mike.

In this particular situation, the total contribution for the plan year (which exceeds the max deductible for the tax year) would be equal to the cash balance allocations for the plan year, so it seems like an appropriate approach to me (considering the plan would be around 100% funded).

But I understand that what seems appropriate to me doesn't make it guaranteed to be okay. I just want to make sure there's nothing out there I'm missing that definitively says, "no, you can't do this."

[Mike Preston]

There is more out there saying you can than anything else. Remember that amounts that aren't deductible are NOT subject to an excise tax if the election in 4972© [i think that's the cite] is made. So, you have a choice, go the 4972© route and then deduct the overage on the 2015 tax return, recognizing that the maximum deductible for 2015 is an independent calculation and if there is precious little difference between minimum and maximum in 2015 the deductible limit in 2015 may not allow deduction of both the carryover and the 2015 minimum (wash, rinse, repeat) or say that there is no need for 4972© because the overage is first eligible for deduction in 2015. You get to the same result, but one requires a 5330 filing (showing no excise tax due) and the other doesn't.

[My 2 cents]

It is my understanding that the maximum deductible contribution for a defined benefit plan has nothing to do with 25% (or 31%) of payroll. That comes into play in determining how much of a defined contribution plan contribution is deductible. The DB maximum is related solely to the plan assets and plan liabilities (generally, the amount needed to fund the plan up to 150% with adjustments related to expected future compensation levels), without any thought as to its relationship to covered payroll. If the DB contribution is high relative to covered payroll, then limitations would apply with respect to deductions for the DC plan (if over 6% of covered payroll).

[figure 8]

Thanks again, Mike.

My 2 cents, good point as well. I was mainly just looking at it as a 31% deduction limit for the company, and then backing into what the max DB contribution could be (given that max DC allocations had already been done). But that's not really the technically correct way to look at it, you're right. I think this makes the case for doing what I'd like to do even stronger.

[mbozek]

Its been a while since I last looked deductions under IRC 404(a)(6) but I thought that under Rev rule 76-28 contributions to a qualified plan can always be deducted in the tax year that they are contributed or for the prior tax year if the contribution is made by the date for filing a tax return with extensions. See Pub 560 P 15 for description of 76-28 requirements. So a corp with a calendar tax year can deduct contributions made in January of 2015 for either the 2014 or 2015 tax year. However the contribution can only be deducted if made on account of a taxable year in writing, e.g., reported on SB. I always recommend that the employer make the contributions for a tax year at the beginning of the following tax year because if the contributions exceed the amount that can be deducted for the prior tax year the excess is deemed to be a contribution for year which it is made.

[figure 8]

Thanks, mbozek. Yes, I agree with you there, though that issue is not really the part that's being questioned (my original post might have been a little confusing).

The issue at hand is that the contributions going on the 2014 SB, when added to the 2014 DC allocations, would be greater than the combo plan deduction limit. However, since they are not actually deducting the full amount of the DB contributions for 2014 (only deducting the amount that takes them up to the combo plan deduction limit - fortunately a good chunk of the contributions was made in January 2015), I think they are in the clear. The more I think about it (and see the responses), the more confident I am. And when I think about it the way that My 2 cents mentions (which is the technically correct way of thinking), it seems pretty clear.