Multiemployer Plans and IRC Section 404

[LIBOR]

Since contributions to a multiemployer plan are mandated by the collective bargaining agreement, how are practitioners handling the case where these exceed the maximum tax deductible amount ?

[Guest Dan Ashley]

1. Examine the actuarial assumptions under which the calculation of nondeductibility was made.

2. Examine the other assumptions under which the calculation of nondeductibility was made.

3. If contributions are still projected to be nondeductible, you can always reduce contributions under the CBA. The union may not agree to reduce the overall package, however.

4. If the union will not reduce the overall benefit package, it may agree to a CBA amendment to divert future contributions to the welfare fund, (eg. to prefund retiree health care obligations), to a defined contribution plan such as an annuity plan or safe harbor 401(k) plan, to the apprentice fund, or to the participants' paychecks.

5. If those options are not palatable, pension benefits may be raised. Think carefully about how high you wish to raise the basic rate. Times are good now, but may not always be good. Once granted, basic rate increases are hard to rescind. Both management and labor trustees may wish to remain more conservative and to grant benefit increases which create a non-recurring plan cost such as a 13th check, or a cost which burns off after a few years, such as a monthly benefit increase to retirees. Think carefully about adding a lump sum option. The projected cost, as calculated by the actuary today, can vary in the future if interest rates change. For example, if interest rates fall, the cost of lump sum options can increase significantly. If that cost increase hits at a time when the plan is under financial pressure because its assumed interest rates also fall, the added stress on the plan may be significant.

[Guest HarveyC]

If a plan is in the unfortunate situation of having made contributions in a prior year (and such amounts were not entirely deductible), are there any options available to a multiemployer plan (that may perhaps not apply to a single employer plan)? For example, if there was a subsequent benefit improvement affecting all years of service, could one adjust the deductible limit for that year in question by, say, adjusting the normal cost to reflect this benefit increase? Are there any other options?

[KJohnson]

Check out the "deemer" language on retroactive amendments in 412©(8) which gives mulits two years after the close of the plan year rather than 2 1/2 months after the close of the plan year for single employer plans.