Contribution Deductibility Question

Sorry for all of the questions lately!  Here's the rough situation:

Total Normal Cost (which is the minimum contribution) - $120,000
Maximum Deductible Contribution - $25,000 (due to positive asset performance)

So, does this mean that they can't deduct the entire contribution or can they still take just the required minimum contribution and nothing more?

Thanks in advance!

IRC 404(o)(1)

As David correctly notes, the maximum deductible contribution is equal to the greater of the minimum required contribution, or the amount otherwise calculated under 404(o).

However, this question disturbs me a little. The actuary who calculated the maximum should be aware of this rule and shouldn't have provided you with a maximum smaller than the minimum.

I have to wonder if the actuary did take that into account and the maximum is correct, and you are misinterpreting the results. The minimum is not equal to just the target normal cost - if the value of plan assets (reduced by any credit balances) is greater than the funding target, the minimum required contribution is equal to the target normal cost minus the amount of such excess. Assuming no credit balances, if the value of assets is more than $120,000 greater than the funding target, then the minimum would actually be $0.

With the current difference between the ARPA segment rates and the un-stabilized segment rates, it should be very rare that the minimum required contribution dictates the maximum deduction.

1 hour ago, C. B. Zeller said:

As David correctly notes, the maximum deductible contribution is equal to the greater of the minimum required contribution, or the amount otherwise calculated under 404(o).

However, this question disturbs me a little. The actuary who calculated the maximum should be aware of this rule and shouldn't have provided you with a maximum smaller than the minimum.

I have to wonder if the actuary did take that into account and the maximum is correct, and you are misinterpreting the results. The minimum is not equal to just the target normal cost - if the value of plan assets (reduced by any credit balances) is greater than the funding target, the minimum required contribution is equal to the target normal cost minus the amount of such excess. Assuming no credit balances, if the value of assets is more than $120,000 greater than the funding target, then the minimum would actually be $0.

With the current difference between the ARPA segment rates and the un-stabilized segment rates, it should be very rare that the minimum required contribution dictates the maximum deduction.

Your right, and I probably should've worded the question better (I was rushing out to a meeting and I'm not an actuary).

In this case, however, since the assets are in excess by enough they could only deduct up to the $25k correct?  Otherwise they'd need to raise benefits, if they could, in order to allow for more contributions to be made.

Just for further reference, the Funding target is roughly $900k and the assets are around a million

13 minutes ago, metsfan026 said:

In this case, however, since the assets are in excess by enough they could only deduct up to the $25k correct?

You need to talk to your actuary. Sounds like that is the case, but I would need to see the full valuation results to say for sure.

14 minutes ago, metsfan026 said:

Otherwise they'd need to raise benefits, if they could, in order to allow for more contributions to be made.

Assuming we're talking about 2021, there are only a few days left to adopt an amendment that could be taken into account for the 2021 valuation. Better decide quick!

23 hours ago, metsfan026 said:

Just for further reference, the Funding target is roughly $900k and the assets are around a million

Definitely push the actuary for more of an explanation, rough math puts the maximum above $350k (1.5 * 900k - 1mm); unless he wants to limit the overfunding by the 415 amount for someone very close to retirement age.

6 minutes ago, Nate S said:

Definitely push the actuary for more of an explanation, rough math puts the maximum above $350k (1.5 * 900k - 1mm); unless he wants to limit the overfunding by the 415 amount for someone very close to retirement age.

Isn't the maximum 1.5 * (Funding Target + Normal Cost - Assets) ?

If anything, you'd only multiply the FT by the 1.5, not all of the terms there. 

Of course there are other factors that can be involved, but in a simple case those might be all zero.

20 minutes ago, Bri said:

If anything, you'd only multiply the FT by the 1.5, not all of the terms there. 

Of course there are other factors that can be involved, but in a simple case those might be all zero.

I think it's 1.5 * (FT + NC) - Assets, but I haven't worked on qualified DB plans in a while.  I think you're allowed to include projected pay increases for that calc.  If so, it should be the PUC AAL instead of the FT.

1 hour ago, metsfan026 said:

Isn't the maximum 1.5 * (Funding Target + Normal Cost - Assets) ?

Not that formula, but definitely more than just what I stated, as I noted, "rough math"; and it'll be above $350k.  Regardless, it looks like the actuary is recommending that you limit it for some other reason; but I agree that he's stated the actual deductible amount incorrectly.

On 3/11/2022 at 2:01 PM, metsfan026 said:

Isn't the maximum 1.5 * (Funding Target + Normal Cost - Assets) ?

No

On 3/11/2022 at 3:13 PM, acm_acm said:

I think it's 1.5 * (FT + NC) - Assets

This is also not correct

The maximum deduction is equal to the greatest of:

• The minimum required contribution under section 430,
• Funding Target + Target Normal Cost + Cushion Amount - Assets, or
• If the plan is not subject to section 430(i), Funding Target determined as if the plan were subject to 430(i) + Target Normal Cost determined as if the plan were subject to 430(i) - Assets

The cushion amount is equal to:

• 50% of the funding target, plus
• If plan benefits are based on compensation, the amount that the funding target would increase if future compensation increases were taken into account
• If plan benefits are not based on compensation, the amount that the funding target would increase if expected benefit increases for succeeding years were taken into account, based on the average annual benefit increase over the last 6 years