Workshop 1
Maximum Deductions
G. Neff McGhie, MSPA
Kevin J. Donovan, CPA, MSPA
DC Plans – elective deferrals
• PLR 201229012
• “… an employee who is treated as benefitting (for 410(b) purposes)
under a section 401(k) plan for a plan year, but who is not eligible for
any employer contributions other than elective deferrals, would not
be considered a beneficiary of the trust for purposes of section
404(a)(3)(i)(l) since section 404(n) of the Code requires the limits on
deductible contributions to be applied without regard to the
existence or absence of elective deferrals …”
• “… Accordingly, the deductible limit under section 404(a)(3)(A) of the
Code … is determined based on compensation paid or accrued
during the taxable year to all employees who are beneficiaries under
… the Plans during the taxable year… taking into account only those
employees who have allocations other than elective deferrals …”
DC Plans – elective deferrals
• While a PLR is not a Revenue Ruling and
cannot be relied upon except by the
taxpayer requesting the PLR, we think it is
correct.
• So, an employee only eligible to make
401(k) deferrals is not a beneficiary for this
purpose.
Multiple DC Plans
• Multiple plans, IRC 404(a)(3)(A)(iv):
– “If the contributions are made to 2 or
more stock bonus or profit-sharing
trusts, such trusts shall be considered a
single trust for purposes of applying the
limitations in this subparagraph. “
– See PLRs 9635045 and 199909060
Multiple DC Plans
• Example. Company X has 10 union employees. The total
compensation of such employees is $400,000. It has only 2
non-union employees, the owner and her spouse, each of
whom earn $40,000 annually. Under the collective bargaining
agreement company X makes a profit sharing contribution
equal to 10% of compensation for the union employees, for a
total of $40,000. The deduction limit under Code
§404(a)(3)(A)(i)(I) is 25% of $480,000 or $120,000. For 2002
this leaves room for $80,000 to be contributed and deducted
to a profit sharing plan for the owner and her spouse.
• Since there are no other non-union employees, §§401(a)(4)
and 410(b) are not a problem. With the 100% of comp.
§415(c) limit $40,000 can be allocated to each spouse.
DC Plans –
Effect of overlapping Plan/Tax Year
•
Effect of overlapping Plan/Tax Year
–
•
Recall 25% limit based on tax-year compensation
Example
–
–
–
–
–
–
Calendar plan-year
June 30 tax-year
Participant comp. June 30, 2008 = $400,000
Employer contribution for 2007 plan-year = $75,000
If timely, $25,000 of contribution for 2008 plan year
could be deducted in tax-year-ended June 30, 2008
But not matching cont. on post 6/30/08 deferrals
•
•
Revenue Rulings 90-105; 2002-46
See later discussion re IRC 404(a)(6) and RR 76-28
DB Plans
• Maximum deduction greater of:
– §430 minimum [§404(o)(1)(B)]
– §404(o)(2) amount [§404(o)(1)(A)]
– With respect to each plan year ending with or
within the taxable year
• Similar language in §404(a)(1) pre PPA
DB Plans –
Effect of overlapping Plan/Tax Year
– Plan Year ≠ Tax Year
• Limit based on plan year beginning within tax year
• Limit based on plan year ending within tax year
• Weighted average of above based on number of
months of each plan year falling within tax year
• Reg. §1.404(a)-14(c)
• Is this still a valid reg post PPA 2006?
• Absent contrary guidance likely reasonable to
assume it is still valid
Defined Benefit Plans
• §404(o)(2) amount = sum of:
– Target normal cost,
– Funding target, and
– Cushion amount, over
– Actuarial value assets
– §404(o)(2)(A)
Cushion Amount
• IRC 404(o)(3)(A)(ii)(I):
– The cushion amount for any plan year is the
sum of—
• (i) 50 percent of the funding target for the plan
year, and
• (ii) the amount by which the funding target for the
plan year would increase if the plan were to take
into account—
– (I) increases in compensation which are expected to
occur in succeeding plan years
Cushion Amount
– We’re going to focus on (ii) above
– i.e., what are the limits in calculating the
increase in funding target by taking into
account future expected compensation
increases?
Future Comp. Increases
• First we turn to 404(o)(3)(B) which says:
– (B) Limitations
• (i) In general In making the computation under
subparagraph (A)(ii), the plan’s actuary shall
assume that the limitations under subsection (l)
and section 415 (b) shall apply.
– (A)(ii) is the computation we are looking at,
the future compensation increases.
Future Comp. Increases
• This is saying the actuary must apply the
limitations under:
– 404(l): which says that we have to recognize
the 401(a)(17) compensation limit, and
– 415(b): which contains both the 415 $ limit
and the 415 % of pay limit
Cushion Increase assuming comp. grows
• First, how do we recognize the limitation
under 404(l)?
– This is saying that we cannot project that the
future compensation will grow in excess of the
current 401(a)(17) limit, currently $260,000.
– However, there is an exception to this rule in
404(o)(3)(B)(ii) which allows a plan that is
covered by the PBGC to assume future
increases in the compensation limit.
Cushion Increase – Example
• Example. Current and past compensation is
$100,000, first year of participation, 1 year of
past service. Plan benefit formula is 10% of pay
times years of service. Plan is not subject to
PBGC. Accrued benefit at BOY is $833.33/mo,
with $833.33 accrual during the year. FT is
$85,768, TNC is $85,768. Cushion without any
comp projection is $42,884, max deductible is:
– $85,768 + $85,768 + $42,884 = $214,420
Cushion Increase – Example
• Example. If Participant’s compensation was
$200,000, then AB at BOY is $1666.67, with
$83.33 accrual during year. FT is $171,536,
TNC is $3,903. Cushion is $85,768, max
deductible is:
– $171,536 + $3,903 + $85,768 = $261,207
• Can actuary assume this compensation
increase?
Cushion Increase – Example
• First, what evidence does actuary possess that
allows him to assume compensation will increase?
– If BOY valuation and increased compensation already
occurred in year, can we assume this as of BOY?
• We think so
– Is owner’s word good enough to assume this
compensation increase? Maybe they already have
“work on the books” to justify this?
• Next, is actuary assuming compensation in excess of
401(a)(17) for a non-PBGC plan?
– Nope, so we’re good there
Cushion Increase – Limitations
• Can the actuary assume a higher 415(b) limit then what
it currently is (based on average comp)?
• Some (most?) actuaries say that this code section really
only means to limit the 415 $ limit, not the 415 % of pay
limit. That the limit on the 401(a)(17) compensation
effectively takes care of the 415 % of pay limit.
– They argue: “Otherwise it makes no sense”
– They also use the argument that this was allowed pre-PPA
with the projected unit credit cost method
– They also argue that this is just for deduction purposes, so
no big deal, right?
• Let’s check the regs on this
Cushion Increase – Limitations
• 404(o) regs
•
•
•
•
•
•
•
• (cue crickets)
Cushion Increase – Limitations
• So, we have a code section that says we, as actuaries,
must reflect the limitations of code section 415(b).
• It does not say code section 415(b)(1)(A), the dollar limit,
so it includes both the 415 $ limit and the % limit.
• I (Neff) think it does make sense to include the % of pay
limit here. Who is it affecting, large plans or small plans?
Small plans. Does Congress really want to encourage
very large deductions for doctors and lawyers? I’m
guessing not.
• If once we get regs and they say it includes the % of pay
limit, are large plans going to cry and say this is hurting
them? No.
Cushion Increase – Limitations
• So the $100,000 question is:
• What if the owner’s past compensation is only $25,000
on average. But their 2013 compensation was
$300,000. Would you increase their deduction limit for
2013 by assuming a BOY accrued benefit in excess of
their 415 % of pay limit, thus increasing their deduction
limit by over $100,000?
• Rebuttal by KD – see above
Controlled Groups IRC 414(b)
• For purposes of sections 401, 408(k), 408(p), 410, 411,
415 and 416, all employees of all corporations which are
members of a controlled group of corporations (within
the meaning of section 1563(a), determined without
regard to section 1563(a)(4) and (e)(3)(C)) shall be
treated as employed by a single employer. With respect
to a plan adopted by more than one such
corporation, the applicable limitations provided by
section 404(a) shall be determined as if all such
employers were a single employer, and allocated to
each employer in accordance with regulations
prescribed by the Secretary.
Controlled Group Deductions
• Example: Two corporations, both owned
by the same individual. Corp A sponsors a
3% safe harbor 401k plan with 2% profit
sharing (Plan A), Corp B sponsors a
defined benefit plan (Plan B). Assume all
combined testing passes, and Plan A
contributions are necessary for testing to
pass in Plan B.
Controlled Group Deductions
• In the past, Corp A has taken the deduction
for contributions made to Plan A and Corp B
has taken the deduction for contributions
made to Plan B.
• In 2014, Corp A has no income, but Corp B
does.
• Can Corp B make the contributions and take
the deduction for these made to Plan A?
Controlled Group Deductions
• First, keep in mind that since this is a controlled
group, the deduction limits are determined on a
combined basis. So 404(a)(7) will apply to the
group. [IRC 414(b)]
• Next, what do the regulations say about allocation
of this deduction limit to the members of the
controlled group?
– (cue crickets again)
• Finally, since 404 does not specify who can deduct
contributions, we should look to section 162.
Controlled Group Deductions
• Code Section 162:
– This section determines if expenses are ordinarily deductible by a
trade or business.
– It limits deductions to expenses which are “ordinary and necessary”
• In the past, the IRS has ruled that it is not an ordinary and
necessary business expense for one corporation to provide
retirement benefits for the employees of another
corporation.
– Rev Rul 69-525, Rev Rul 70-316, Rev Rul 70-532, PLR 8032079
• But can it be argued that the contributions to Plan A by
Corp B are necessary in order for Plan B to remain
qualified?
Controlled Group Deductions
• In Rev Rul 70-532, the IRS stated that the only exception
to having each corporation take the deduction for the
contributions allocated to its own employees is for
termination liability payments under IRC 404(g).
• 404(g) specifically grants a corporation authority to deduct
contributions made for purposes of meeting their
termination liability for a PBGC plan, even though the
corporation did not employ the employees in the plan.
• This is the only known exception for deductions
Controlled Group Deductions
• Let’s flip this: What if Corp A wants/needs to deduct the
contributions made to Plan B?
• IRC 412(b)(2) states that each member of a controlled
group shall be jointly and severally liable for payments of
contributions required under code section 430.
• Is this sufficient to justify the “ordinary and necessary”
requirement under code section 162?
– Many think so, but we know of nothing official.
• Until we get regulations under 404, we need to be careful.
• Safest course of action is for each corporation to deduct
the contributions based on compensation paid by that
corporation.
Combined Plan Limits –
IRC §404(a)(7)
• Applies where employer contributes
to both DB and DC plan for same tax
year [IRC §404(a)(7)(A)]; AND
• At least one employee is a beneficiary
in both plans [IRC §404(a)(7)(C)(i)]
Combined Plan Limits –
IRC §404(a)(7)
• Deduction limited to greater of
– 25% of compensation paid to beneficiaries of
the plans during the tax year; or
– contributions to DB plan to extent not in
excess of minimum funding requirement
• Not less than funding target over actuarial
value of assets (Note absence of TNC)
• IRS has indicated that MAP does apply for
this purpose (IRS phone forum)
• IRC §404(a)(7)(A)
Combined Plan Limits –
IRC §404(a)(7)
• Limit does not apply – To extent employer contributions to DC plan
do not exceed 6% of compensation (of DC
plan ‘beneficiaries’)
• IRC §404(a)(7)(C)(iii)
– To multiemployer plans
• IRC §404(a)(7)(C)(v)
– To PBGC plans
• IRC §404(a)(7)(C)(iv)
Combined Plan Limits –
IRC §404(a)(7)
• Notice 2007-28
– Q&A 8 - where DC contributions exceed
6% of comp, only DC contributions over
6% considered in determining 25% limit
• Effectively translates to 31% limit
– BUT, only consider compensation of DC
beneficiaries in determining the 6%
– How much do you have to allocate to someone to
count their comp?
» $5 for a $260K employee??
Combined Plan Limits –
IRC §404(a)(7)
• DB Plans exempt from PBGC coverage
– Plans of professional group if plan never
covered more than 25 active participants
• Physicians, dentists, D.O.s, O.D.s, lawyers, CPAs,
P.E.s, architects, actuaries, others where license
requires “advanced study”
– Not APAs, QPAs, RIAs, real estate prof, etc.
– ERISA Title IV §§ 4021(b)(13), 4021(c)(2)
Combined Plan Limits –
IRC §404(a)(7)
• DB Plans exempt from PBGC coverage
– Plans covering only “substantial” owners
• A “substantial owner” is an individual who (at
any time during the prior 60-months) owns:
– the entire interest in a sole proprietorship
– more than 10% of either a capital or profits interest in a
partnership, or
– more than 10% in value of either the voting or all stock of
a corporation
• ERISA Title IV §§ 4021(b)(9), 4021(d)
Combined Plan Limits –
IRC §404(a)(7)
– Attribution rules of IRC §§ 1563 and 414(c) apply in
determining ownership
– Under IRC §1563(e) “An individual shall be considered
as owning stock owned … by … his children who have
not attained the age of 21 years, and, if the individual has
not attained the age of 21 years, the stock owned … by
… his parents”
– Children not deemed to own the stock of their parents via
above rules are not “substantial owners” and therefore
could cause coverage
– 60-month rule basically requires child to be age 26 for
this rule to cause coverage
Combined Plan Limits –
IRC §404(a)(7)
–
Consider ‘carve out’ DB & 401(k) trying to
avoid 404(a)(7) combined limit while
allowing everyone to defer
– Recall IRC §404(n):
• “Elective deferrals … shall not be subject to
any limitation contained in paragraph (3), (7),
or (9) of subsection (a) … and such elective
deferrals shall not be taken into account in
applying any such limitation to any other
contributions.” (emphasis added)
Combined Plan Limits –
IRC §404(a)(7)
• Employer sponsors DB plan & 401(k) PS plan
– Employees in DB plan eligible for just deferrals in 401(k)
PS plan
– Other employees in 401(k) PS plan receive PS
contributions (but are not in DB plan)
–
i.e., absent deferrals no one benefits in both plans
• 2005 IRS/ASPPA Q&A #21 IRS indicated that the
combined plan limit did not apply
– Of course it doesn’t – 404(n) controls
– BUT this requires conclusion that deferral only
participants are NOT beneficiaries in DC plan
• And therefore comp. not considered in DC limit – above PLR
Partnership of P.C.s
• Plans of affiliated service groups
treated as “multiple employer” plans
[Prop. Reg. §1.414(m)-3(c)]
• Multiple employer plans provide for
separate deduction limit for each
employer [IRC §413(c)(6)]
– Special election for plans in effective prior
to 1989
Small Medical Group P.C.
401(k) plan with CB plan
Earnings Age
DB
Profit
Sharing
& SH
Total
Employer
Total
$ 23,000
$ 119,650
23,000
119,650
Dr. A
$ 255K
56
Dr. B
255K
56
63,150
33,500
96,650
NHC1
15K
27
300
1,050
1,350
-
1,350
NHC2
30K
43
600
2,100
2,700
-
2,700
NHC3
30K
59
600
2,100
2,700
-
2,700
NHC4
30K
59
600
2,100
2,700
-
2,700
NHC5
30K
40
600
2,100
2,700
-
2,700
NHC6
25K
40
500
1,750
2,250
-
2,250
Tot
$ 670K
$ 63,150 $ 33,500 $ 96,650
401(k)
$120,000 $ 78,200 $207,700 $ 46,000
$ 253,700
Small Medical Group P.C.
401(k) plan with CB plan
• DC plan: 3% non-elective safe harbor
401(k) PLUS profit sharing as follows:
– Owners – maximize
– NHCEs – 4% of compensation
• DB plan: Cash balance plan with
contribution credits as follows:
– Owners - $63,150
– NHCEs - 2% of compensation
• Cost for employees
$14,400
• Employer total = 31% of compensation
– i.e. 31% of 670,000 = $207,700
Partnership of P.C.s
401(k) plan with CB plan
Earnings Age
DB
Profit
Sharing
& SH
Total
Employer
Total
Dr. A
$ 255K
56
Dr. B
255K
56
45,550
33,500
79,050
NHC1
15K
27
300
750
1,050
-
1,050
NHC2
30K
43
600
1,500
2,100
-
2,100
NHC3
30K
59
600
1,500
2,100
-
2,100
NHC4
30K
59
600
1,500
2,100
-
2,100
NHC5
30K
40
600
1,500
2,100
-
2,100
NHC6
25K
40
500
1,250
1,750
-
1,750
Tot
$ 670K
$ 45,550 $ 33,500 $ 79,050
401(k)
$ 23,000
$ 102,050
23,000
102,050
$ 94,300 $ 75,000 $169,300 $ 46,000
$ 215,300
Partnership of P.C.s
401(k) plan with CB plan
• DC plan: 3% non-elective safe harbor 401(k) PLUS
profit sharing as follows:
– Owners – max
– NHCEs – 2% of compensation
• DB plan: Cash balance plan with contribution credits as
follows:
– Owners - $45,550
– NHCEs - 2% of compensation
• Cost for employees
$11,200
• P.C.s individually limited to 31% of compensation
– i.e. 31% of $255,000 = $79,050
Partnership of P.C.s - 401(k) plan with
CB plan – 6% PS for P.C.s
Earnings Age
DB
Profit
Sharing
& SH
Total
Employer
401(k)
Dr. A
$ 255K
56
$185,000
Dr. B
255K
56
185,000
15,300
200,300
NHC1
15K
27
300
1,500
1,800
-
1,800
NHC2
30K
43
600
3,000
3,600
-
3,600
NHC3
30K
59
600
3,000
3,600
-
3,600
NHC4
30K
59
600
3,000
3,600
-
3,600
NHC5
30K
40
600
3,000
3,600
-
3,600
NHC6
25K
40
500
2,500
3,000
-
3,000
Tot
$ 670K
15,300 $200,300 $ 23,000
Total
23,000
$373,200 $ 46,600 $419,800 $ 46,000
$ 223,300
223,300
$ 465,800
Partnership of P.C.s - 401(k) plan with
CB plan – 6% PS for P.C.s
• DC plan: 3% non-elective safe harbor 401(k)
PLUS profit sharing as follows:
– Owners – 3% of compensation
– NHCEs – 7% of compensation
• DB plan: Cash balance plan with contribution
credits as follows:
– Owners - $185,000
– NHCEs - 2% of compensation
• Cost for employees
$19,200
• P.C.s not limited to 31% of compensation
– P.C.s’ deduction for contribution to DC only 6%
DB Exception to Excise tax
• IRC 4972(c)(7)
• “In determining the amount of nondeductible
contributions for any taxable year, an
employer may elect for such year not to take
into account any contributions to a defined
benefit plan …”
• OK, so, why would they not elect?
– And HOW do you elect?
Year Deductible
• Plan contribution deemed made on
last day of preceding taxable year if
payment on account of such taxable
year and made not later than due
date for filing tax return for such
taxable year (including extensions)
– §404(a)(6)
Year Deductible
•
In order for §404(a)(6) to apply (allowing deduction
in tax year prior to year of deposit):
– Contribution must be treated as a contribution
actually received on last day of tax year would be
treated; and
– No later than due date of tax return, employer either:
•
•
•
designates payment in writing (to PA or trustee) as “on
account of” employer’s “preceding taxable year”; or
claims payment as deduction on tax return for
preceding taxable year
Revenue Ruling 76-28
Year Deductible
•
Note from above “Contribution must be treated
as a contribution actually received on last day of
tax year would be treated”
–
This would seem to disallow prior year deduction
for amounts contributed pursuant to post yearend
corrective amendment
under Reg.
§1.401(a)(4)-11(g)
Further, from §1.401(a)(4)-11(g)(5)
–
•
“… the amendment is not given retroactive effect for
purposes of section 404 …”
Year Deductible
•
A payment may be designated as on account of
preceding taxable year (as provided above) at
any time on or before the due date (including
extensions) of tax return for such year
–
–
SO, where return first filed without taking deduction,
amended return may be filed claiming deduction if
filed before (extended) due date
CONVERSELY, if deduction claimed on preceding
year return for post year-end deposit, employer may
not amend return to push deduction to current year
Year Deductible
•
Presume that:
–
–
–
–
•
•
payment made within 8 ½ months after year-end
treated as prior year deposit for §412 (minimum funding)
not deducted on prior year tax return, and
nothing in writing designates contribution is “on account of”
prior tax year
How about deposit made 10/15 (within 404(a)(6) period
for Sole Prop) for calendar year plan?
Can contribution be “on account of” one year for
minimum funding purposes and another year for
deduction purposes?
Year Deductible
•
Revenue Ruling 77-82
– Taxpayer allowed to take deduction in 1975 for
contribution made within §404(a)(6) period, but count
for §412 (minimum funding) in 1976 (§412 did not
apply until years beginning after 1975)
– Service cited following language in Temp. Reg.
§11.412(c)-12(c)(2) (allowing 8½ month post yearend period to satisfy minimum funding in case of
pension plans other than single employer DB plans):
Year Deductible
– “The rules of this section relating to the time a
contribution … is deemed made for purposes of …
section 412 are independent from the rules contained
in section 404(a)(6) relating to the time a contribution
… is deemed made for purposes of claiming a
deduction for such contribution under section 404.”
[Temp. Reg. §11.412(c)-12(c)(2)] (emphasis added)
Year Deductible
•
PLR 9107033:
– For 1988 company maintained three plans – a money
purchase plan, a PS plan and a DB plan
– Contributions to three plans exceeded §404(a)(7) limit
– Company wished to treat certain contributions to DB
plan made after year-end but prior to extended due
date of tax return (and minimum funding deadline) as
1988 contributions for §412 but as 1989 for §404
– Citing Temp. Reg. §11.412(c)-12(c)(2) and RR 77-82,
Service allowed taxpayer to treat contributions in
above manner
Year Deductible
•
Note that with contribution considered 404
contribution for subsequent year, limits of §404
for following year will apply
– and they will apply to all amounts designated as
being “on account of” such subsequent year
– i.e., contribution is not added to following year’s limit it becomes deductible within such limit
– (Presumably) Reg. §1.404(a)-14(d)(2)(i) will require
that contribution be excluded from assets when
determining deductible amounts for subsequent year
Year Deductible
• 2011 Greybook Q&A 7
• A company has a calendar taxable year and sponsors a
pension plan with a calendar plan year. Which of the
following combinations are acceptable for a contribution
made during the 2010 §404 contribution grace period
(January 1, 2011 to September 15, 2011)?
–
–
–
–
a) Deduct in 2010, reflect on 2010 Sched SB?
b) Deduct in 2010, reflect on 2011 Sched SB?
c) Deduct in 2011, reflect on 2010 Sched SB?
d) Deduct in 2011, reflect on 2011 Sched SB?
Year Deductible
• 2011 Greybook Q&A 7 (cont)
• RESPONSE
• a), c), and d) are acceptable. IRC §404(a)(6) deems a
contribution made after the last day of a taxable year to
be made on the last day of a taxable year if the payment
is made on account of such taxable year. A contribution is
considered to be on account of the 2011 plan year when
reported on the 2011 Schedule SB and thus cannot be
deducted on the sponsor’s 2010 tax return
• COMMENTARY TO FOLLOW
Year Deductible
• We respectfully disagree that (b) is not acceptable
• IRC 404(a)(6) and 76-28 do not require contribution to be
on account of preceding plan year
• They require it to be on account of preceding tax year
• As detailed above, there is plenty of authority (e.g. RR 7782) providing that they can be different
– e.g. as in (c) where on 2010 SB but 2011 tax return
• If a contribution is within deductible limit for preceding
year, and is made by due date of preceding year tax
return, it should be deductible in preceding year
irrespective of treatment for funding purposes
Short Plan/Tax Years – DC Plans
• DC plans allowed deduction of 25% of comp. of
plan beneficiaries during employer’s tax year
• Effect of short PY on deduction for contributions
to DC plan varies depending following factors:
–
–
–
–
Taxable year
Are tax year and PY both being changed
Does tax year = PY before change?
Does tax year = PY after change?
Short Plan/Tax Years – DC Plans
• Example
– Company has June 30 tax year-end
– PS plan also has June 30 year-end
– Effective January 1, 2014 tax-year changes to
calendar year
• Short tax-year from 7/1/13-12/31/13
• PYE changed at same time
• For short period 7/1/13 -12/31/13 maximum
deduction is 25% of participant compensation
for this 6-month period
Short Plan/Tax Years – DC Plans
• Example
– Company has June 30 tax year-end
– 401(k) PS plan also has June 30 year-end
– Effective January 1, 2014 tax-year changes to calendar
• Short tax-year from 7/1/13-12/31/13
• PYE not changed
• For short tax-year maximum deduction 25% of participant
comp. for this 6-month period
• Contributions for PYE 6/30/14 deductible in short tax-year if
made by (extended) due date of tax return
– But not matching contributions related to post 12/31/13
deferrals (Revenue Rulings 90-105; 2002-46)
Short Plan/Tax Years – DC Plans
• Example
– Company has June 30 tax year-end
– PS plan has December 31 year-end
– Effective July 1, 2013 PYE changed June 30
• Short PY from 1/1/13-6/30/13
• Tax-year not changed
• Will be two PYs ending during 6/30/13 tax-year
– 2012 calendar year and
– Short PY 1/1/13-6/30/13
• Maximum deduction 25% of participant comp. for tax-year
Short Plan/Tax Years – DB Plans
• Rev. Proc. 87-27
– Valid post PPA?
• Deductible amount when DB plan has short plan year
resulting from a change in plan year
– If plan year change results in more than one plan year being
associated with employer’s taxable year (i.e., more than one
plan year beginning or ending in tax year), or
– Total number of months of plan year or years associated
with tax year different from number of months in tax year
– Deductible limit for tax year must be adjusted
Short Plan/Tax Years – DB Plans
• Adjustment obtained by multiplying sum of
deductible limits for associated PY(s) by fraction
– Numerator "t" = number of months in the tax year
– Denominator "p" = aggregate number of months in
associated PY(s)
• “Deductible limit” for short PY determined by
ratably reducing otherwise deductible limit for 12month PY in proportion to number of months of
short PY
Short Plan/Tax Years – DB Plans
• Example
• Employer with 1/1-12/31 tax year has historically based
deductible limit for DB plan on basis of PY commencing
October 1 within such calendar year
• In 2013 changed PY to calendar year
• Short PY 10/1/13-12/31/13
– This is PY associated with 2013 calendar tax year
• Assume deductible limit for a full PY = $120,000
– Pro rated = $30,000 ($120,000 * 3 / 12)
• Deductible limit for tax year is $120,000
– Deductible limits for short plan year = $30,000, times
– ‘t’ = 12, divided by ‘p’ = 3
Short Plan/Tax Years – DB Plans
• Example
• Same plan but in 2013 changed PY to PYE 11/30
• Short PY 10/1/13-11/30/13
– This PY is associated with 2013 calendar tax year
– As is PY 12/1/13-11/30/14
– i.e. both begin in 2013 tax year
• Assume deductible limit for two month PY = $20,000
• Assume deductible limit for PYE 11/30/12 = $190,000
• Deductible limit for tax year is $180,000
– Sum of deductible limits = $210,000, times
– ‘t’ = 12, divided by
– ‘p’ = 14
Short Plan/Tax Years – DB Plans
• Example
• Calendar year employer adopts defined benefit plan
with initial PY 1/1/13-11/30/13
– Short year not result of change in PY
– Rev. Proc. 87-27 therefore does not apply (apparently)
• Second PY runs 12/1/13-11/30/14
• Both PYs begin in 2013 tax year
• Can both years’ deduction be taken in 2013?
– It certainly has been done!
Short Plan/Tax Years – DB Plans
• Short tax years
• Revenue Ruling 80-267 – valid post PPA?
• Deductible amount when DB plan has short tax year
resulting from a change in tax year where limit based on
PY beginning in tax year
• Where minimum funding amount is limit
– Prior funding deficiency (if any), plus
– “Tax year ratio” multiplied by sum of current charges and
credits to FSA
• “Tax year ratio” = number of months in short tax year / 12
• If other deductible limit utilized, limit for short tax year is
product of deductible limit and “tax year ratio”
• Special rules apply for subsequent tax years
Short Plan/Tax Years – DB Plans
• Initial short tax years
• No pro-rating based on months in tax year
• Instead, reasonable compensation rules have
been applied
– Private Letter Ruling 7744020
– Plastic Engineering & Manufacturing Co. (78 T.C. 1187
June 30, 1982)
– Bianchi v. Commissioner, 66 T.C. 324 (1976), affd.
without published opinion 553 F.2d 93 (2d Cir. 1977)
– LaMastro v. Commissioner, 72 T.C. 377 (1979)