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2 Plan Year Deduction in One Tax Year for New DB Plan
BenefitsLink Message BoardsLink to more items from this source
Aug. 19, 2021

"I am doing a bit of research for a hypothetical plan design. I've worked with overlapping plan/tax years in the past but nothing like the following:

Calendar corporation ending 12/31/2020. Filed 2020 tax return end of May 2021 with extension. Wants to set up a DB plan (non-PBGC and covering owners+spouses only) effective 10/1/2020 with PYE 9/30/2021 using 2020 W-2's. Generating minimum required contribution (MRC) of $100k and 404(o) maximum of $120k. Not deposited until after 9/15/2021 so cannot be deductible for 2020. Second plan year starts 10/1/2021 and ends 9/30/2022 using 2021 W-2's. This plan generates $50k of MRC and maximum $300k of 404(o). They will deposit by 12/31/2021.

They want both plan years to be deducted for 2021 tax year, whatever the amount is permitted. The plan year starting 10/1/2022 and ending 9/30/2023 will be deducted for 2022 tax year and based on 2022 W-2s.

There are a few different things I am trying to understand here.

  1. The last line of 1.404(a)-14(c) states 'The employer must use the same alternative [either for plan year commencing in tax year or plan year ending in taxable year--I have no idea about the 3rd alternative i.e. weighted average so let's leave it alone] for each taxable year unless consent to change is obtained from the Commissioner under section 446(e).'
  2. That seems inconsistent with the design in mind above. Am I missing something here or overthinking it?
  3. Separate from the above issue, what's the maximum deduction for 2021 tax year regarding the DB plan? I think $300k because it's the 404(o) limit under the 2021 valuation using 2021 W-2's. It includes MRC's for 9/30/2021 and 9/30/2022 plus some cushion. I believe this is a very conservative approach but I'm still concerned about issues #1 and #2.

Now, as a bonus, they want to add a 401k/PS plan for 2021. I don't believe it's an issue if the plan is calendar plan (remember, no testing issues because all are HCEs). The deduction would be limited to 6% of all 2021 W-2's as not covered by PBGC. Do you agree?"

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