Deductibility upon small plan termination; liabilities in excess of PB

[Guest Don N]

Back in February there was a discussion on this issue;in the under 100 life situation, it's not clear to me that plan term benefit liabilities in excess of PBGC guaranteed benefits are deducted over 10 years; does anyone have a cite or is the reference to Q&A #10 from the '94 grey book in that Feb. discussion the only guidance ?

[Guest]

Try Section 404(g) of the Code. You can get some further guidance from part 1.3.4.2 of Announcement 98-1.

[Guest Don N]

Thanks for the cite; 1.3.4.2 of Announcement 98-1 points to 404(a) & 404(a)(1)(A)(iii) indicates 10 year amortization;and I guess if an interest rate of zero is used the IRS wouldn't object. Is this the "guidance" to support a 10 year straight-line amortization ?

[Guest]

My reading of 404(g) and Announcement 98-1 is as follows:

A plan sponsor who is covered by PBGC can contribute the difference between the value of plan benefits (up to the PBGC guarantee limit)and get a current deduction for the full contribution,but not in excess of the current year's Full Funding Limitation.Any excess is subject to the 10-year amortization rule.

Example:

Total plan PVAB=1,000,000

PBGC limit PVAB= 900,000

Plan assets = 750,000

The sponsor must contribute 250,000 in order to demonstrate sufficiency of assets to the PBGC.He gets a current deduction for 150,000 under 404(g) and deducts the remaining 100,000 under 404(a)(1)(A)(iii).It's also my understanding that the Service would consider the 100,000 as being subject to the 4972© excise tax on contributions in excess of the deductible limit for the given years.If so that's pretty twisted logic. Try explaining that to your client.