Which Employer takes 25% deduction

[Rocha]

Hello all

Generous Employer LLC is the sponsor of a Profit-Sharing plan AND a Cash Balance Plan.  Jim owns 100 % has 20 employees. 

Generous Employer, INC is adopting employer of same plans (PS and CB). Jim owns 80%. another 10-15 employees

So, one DC plan, two related sponsoring companies and one Cash Balance Plan, two related sponsoring companies. 

They make a generous annual contribution to the DC and Cash Balance plans adhering to the 25% aggregate deduction limits.

The question: does it matter which tax return takes the deduction if the contributions are going into the same plan owned by same owners?

TX

[C. B. Zeller]

IRC 414(b) says:

Quote

With respect to a plan adopted by more than one [member of a controlled group], the applicable limitations provided by section 404(a) shall be determined as if all such employers were a single employer, and allocated to each employer in accordance with regulations prescribed by the Secretary.

So you determine the deduction limit as if all members of the controlled group were a single company, and then allocate the deduction using some reasonable method. Note that the "regulations prescribed by the Secretary" referred to in the statute do not exist.

It is probably reasonable for each entity to take a deduction equal to the amount of the contribution allocated to its employees in the DC plan. In the DB plan, the contribution might be allocated in proportion to the benefits accrued in the current year by the employees of each entity. There are likely other reasonable ways to allocate the contribution as well.

I'll also point out that the deduction limit is usually higher than 25% in a DB+DC combo situation. Since it appears the DB plan has more than 25 active participants, it should be covered by PBGC. Therefore, the deduction limit is probably 25% on the DC plan, plus the amount determined under 404(o) on the DB plan. If the DB plan is not covered by PBGC, then the combined deduction limit is usually 31% of compensation, or if the contribution on the DC plan is not more than 6% of compensation, then it would be the 404(o) amount plus the DC contribution.

[Tom Veal]

Let me just add that deductions under section 404 must also be "ordinary and necessary" business expenses that are deductible under section 162.  It isn't likely that contributions for the benefit of INC's employees are ordinary and necessary for LLC or vice versa.  Therefore, unless some unusual facts are present, each employer's return should claim a deduction only for the cost related to its own employees.

[truphao]

following up on Tom's  comment - thus, this is really a CPA's job to do the "reasonable" allocation.   The TPA/actuary should figure out the deductible amount for the whole plan and stop there...despite of temptation to keep going...