SECURE Act Er Contribution Tax Credits

Er Contribution for 2023 funded in 2024.  The tax credit is towards 2023 taxes, right?

14 minutes ago, austin3515 said:

Er Contribution for 2023 funded in 2024.  The tax credit is towards 2023 taxes, right?

It refers to the taxable year, so I would agree.

Ya know I went back and red the code and it seems like it says "paid or incurred." You can interpret the word incurred in at least 2 ways as far as I can tell, so not sure, but it certainly does indicate that it might not necessarily be the same taxable year in which it was paid.  I'm actually surprised I can't find anyone commenting on this question.  IT seems pretty obvious that it should be addressed.   That word incurred I think is too open. For example, I am doing admin for 2023, but I'm not doing the work in 2023.  Was the expense incurred in 2023 or 2024?  If I say it was incurred in 2023 I can take the credit in 2023.  I use my fees as an example becauise it's based on the same exact rule.

And what if a contribution is discretionary?  Is it incurred in 2023 if a choice was made in 2024?  Isn;t that different than a safe harbor nonelective built into the document where it was clearly incurred with each passing paycheck?   

I have no answers but I think I'm asking the right questions!

I know, I know, we need guidance...

Until the Treasury department’s or its Internal Revenue Service’s guidance:

Consider Internal Revenue Code of 1986 (26 U.S.C.) § 7701(a)(25):

When used in this title, where not otherwise distinctly expressed or manifestly incompatible with the intent thereof— The terms “paid or incurred” and “paid or accrued” shall be construed according to the method of accounting upon the basis of which the taxable income is computed under subtitle A.

Consider I.R.C. § 446. Consider the regulations interpreting and implementing § 446.

Consider logical consistency with I.R.C. § 404, and with the regulations interpreting and implementing § 404.

To the extent that “incurred” is relevant, consider what incurred means under generally accepted accounting principles.

How about this logic?

You can't take a deduction for a contribution you also receive a credit for

You can deduct the contribution in the allocation year or contribution year (if different and if timely)

The credit belongs to the same tax year as the contribution, whether that is year of allocation (incurred) or year of contribution (paid)

I guess it would be nice of the IRS to just tell us that logic is their position.  And then what if you flip flop positions, is that ok?  Can you claim 2 credits in 1 year, one based on cash basis and once based on accrual?  I just think the timing of the credits needs to be explained.

4 minutes ago, austin3515 said:

I guess it would be nice of the IRS to just tell us that logic is their position.  

Get out of here with this common sense nonsense!

You know the old saying, "Common sense is the least common of all senses."

My favorite Benefitslink quote of all time.  I saved this for 16 years now!!

I don't think there is any doubt, nor need for IRS clarification. I read "incurred" as "accrued" (not just because of the similarity in letters!) so it would generally be considered a 2023 contribution. Interestingly though, I guess it could be used for 2024 if desired, as long as that does not mess with 2024 limitations (e.g. 415).

For austin3515’s questions, does it matter whether the employer’s Federal, State, and local income tax returns had been and are made on the cash-receipts-and-disbursements method of accounting?

To the extent that “incurred” matters, which facts might establish that a discretionary contribution regarding a year was incurred within that year?

48 minutes ago, Peter Gulia said:

To the extent that “incurred” matters, which facts might establish that a discretionary contribution regarding a year was incurred within that year?

A resolution/record of action declaring the decision to make such a contribution for that plan year?

1 hour ago, Peter Gulia said:

For austin3515’s questions, does it matter whether the employer’s Federal, State, and local income tax returns had been and are made on the cash-receipts-and-disbursements method of accounting?

I don't think so, since retirement plan contributions can be accrued even if using cash basis accounting.

Is there a tax law difference between treating a contribution as "incurred" to take a deduction and treating a contribution as "incurred" to take a credit?

Should these be treated the same? Or differently?

If you read 45E (as amended by SECURE 2.0) carefully, the "paid or incurred" language only appears in paragraph (a), with respect to the credit for qualified startup costs. If I'm understanding the question correctly, you are asking specifically about the credit under paragraph (f) for employer contributions.

Reading paragraph (f) for similar language, it appears to be missing a word! Removing the parentheticals, it says "the credit allowed for the taxable year under subsection (a) shall be increased by an amount equal to the applicable percentage of employer contributions by the employer to an eligible employer plan." Contributions WHAT by the employer to an eligible plan?

Sloppy drafting aside, given what paragraph (e)(2)(B) has to say about a disallowance of a deduction for amounts for which the employer receives a credit under paragraph (f), it seems to me that the intention is that the credit is available for a year in which the employer would otherwise have been able to take a deduction for the contributions, in other words, the prior year as long as the timing of the contribution satisfies 404(a)(6).

"he credit allowed for the taxable year under subsection (a) " 

I asked a prominent ERISA attorney if he agreed that this reference to paragraph a) adopted the same language in paragraph a about paid or incurred, and he did not believe so.  At the risk of being audacious I would suggest it is the only thing we have to go by.

From the perspective of accounting principles, an expense is incurred when the employer becomes liable for during the accounting period for paying that expense.   If this liability is paid during the accounting period, then the expense is categorized as incurred and paid. A clean example in our industry is a fixed match calculated each payroll period.  On each payroll date, the employer incurs the liability to fund the match for that payroll period.  If the funding occurs during the accounting period, then that payroll period match was incurred and paid.

If the liability is paid after the close of the accounting period, then the expense is categorized as incurred and accrued.  In effect, all accrued expenses are incurred expenses, but not all incurred expenses are accrued expenses.  If, in our example above, a payroll funding occurs after the close of the accounting period then that payroll funding was incurred and accrued.

From the perspective of plan accounting method, cash accounting would include only expenses that were incurred and paid during the accounting period, modified cash accounting would include all expenses that were incurred and paid during the accounting period plus some but not all expenses that were incurred and accrued, and accrual accounting would include all expenses that were incurred during the accounting period including all those that were paid during and paid after the accounting period.

For tax purposes, the accounting for the tax credit should follow the accounting for the tax deduction for discretionary employer contributions (both match and NEC).  Best practice for discretionary contribution is to memorialize tax year of the contribution in a Board or entity resolution declaring or authorizing decision.