Apparent "Catch-22" in money purchase pension plan funding:

[Guest Patrick Foley]

Apparent "catch-22" in money purchase pension plan funding. If required contribution to a 25% money purchase plan isn't made by the tax filing date including extensions, no deduction for the year is available under Code section 404(a), but the obligation to contribute under Code section 412 remains. This appears to create a catch-22: if the contribution isn't made, the funding deficiency gives rise to an excise tax under Code section 4971. If it is made, there is an excise tax under Code section 4972. Moreover, since the plan uses up its entire 404(a) deduction every year for current funding, it appears that whichever excise tax is chosen will recur every year until accruals are reduced or stopped.

Is there something I'm missing here?

[rcline46]

Minimum funding under 412 trumps 404. I think it is all deductible in the year it is all caught up.

[R. Butler]

This may not be an issue, but if this is a calendar year plan, the contribution is already late for minimum funding purposes regardless of the due date of the employer's tax return.

[Guest Patrick Foley]

This is very helpful. Assuming that the contribution is made soon, the taxpayer's harm appears limited to one year's worth of 4971 excise tax and the deferral of the deduction from the 1999 to the 2000 return.

It now appears, unfortunately, that rather than a pure money purchase plan, this may be a paired money purchase and profit sharing plan. This combination seems to trigger a 25% of compensation overall limit under 404(a)(7)(A). Assuming the money purchase plan has a 10% formula (and that 1999 and 2000 compensation are equal), I would think that all the 1999 and 2000 money purchase contributions would be deductible in 2000, but no only a 5% profit sharing contribution for one of the two years and none for the other. Though the excise tax is smaller, there is a permanent loss of contribution and deduction under the profit sharing plan.

Does this make sense?

[david rigby]

I think that is correct.

But a word of caution: "Minimum funding under 412 trumps 404". This may not be a universal statement if the plan year differs from the sponsor's fiscal year.

[rcline46]

OOOOOOOHHHHH, you gots a BBBBBIIIIIIIGGGGGGGG problem there! Or rather your client does!

No problem with the 412 plans. And you are correct on the profit sharing side only allowing 5% (in your example) for 2000. If the plan conditions the contribution on being deductible, you might get it back! Otherwise, not deductible going in, excise taxes every year as long as it remains non-deductible, and taxable when coming out.

Note, they may NEVER (but be careful - maybe can) be able to deduct, but the funds could be DEDUCTIBLE!