Maximum Deductions For Pension Plans - American Society of Pension ...

[Pages:29]10/17/2016

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Maximum Deductions For Pension Plans

Kevin J. Donovan, CPA, EA, MSPA, FCA Kurt F. Piper, FSPA, MAAA, ASA, EA

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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 ..."

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DC Plans ? Elective Deferrals

? While a PLR is not a Revenue Ruling and cannot be relied upon except by the taxpayer requesting the PLR, I believe this ruling is the correct interpretation of Section 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)

? So, an employee only eligible to make 401(k) deferrals is not a beneficiary for this purpose.

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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

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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 seems reasonable to

assume it is still valid

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Defined Benefit Plans

? ?404(o)(2) amount = sum of:

? Target normal cost, ? Funding target, and ? Cushion amount, over ? Actuarial value assets

? Reduced by un-deducted contributions? ? Pre-PPA Reg. Section ?1.404(a)-14(d)(2)(i) ? ?404(o)(2)(A)

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Defined Benefit Plans

? Reg. Section ?1.404(a)-14(d)(2)(i) ? "There must be excluded from the total assets of the

plan the amount of any plan contribution for a plan year ... that has not been previously deducted, even though that amount may have been credited to the funding standard account ..." ? Does this still apply? - Would certainly make sense that it should

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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

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Cushion Amount

? When calculating 50% cushion, plans with less than 101 participants exclude from funding target any liability due to benefit increases for HCEs from amendments "made or effective" (whichever is later) in last 2 years ? IRC ?404(o)(4)

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Cushion Amount

? Number of participants determined aggregating all DB plans of all related employers [?404(o)(4)(B)]

? But exclude employees of non-related employers in such plans (e.g. if multiple employer or multiemployer plan)

? Greybook Q&A 1998-6

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Cushion Amount

? Under similar pre-PPA rule, 2 year period measured from beginning of Plan Year for which liability determined

? Ex. ?412(c)(8) amendment adopted 3/15/04 effective 1/1/03 increases benefits for HCEs

? When measuring ?404(a)(1)(D) limit for 2006 benefit increases applicable to such amendment may not be considered

? Greybook Q&A 2002-3 ? Note different result if amendment adopted

pre year-end ? so if amendment adopted 12/31/03 two year rule would not apply for 2006 and such benefits considered in measuring 2006 UCL limit

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Cushion Amount

? In same question IRS also indicated:

? Limit does apply to multiemployer plans with 100 or less participants

? Short plan year not considered a full year

? i.e. 2 years = 24 months

? COLA adjustments under ??401(a)(17) and 415(b) not considered amendments

? Date amendment `made' = date adopted

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Cushion Amount

? Is adoption of plan an amendment?

? No ? Notice 2007-28, Q&A 5 ? BUT, employer must not have maintained DB plan

covering HCE covered by new plan during past 2 years

? Query as to determination of HCE status

? Year of amendment? (my vote) ? Year deduction being determined?

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Plans not at-risk

? Plans NOT at-risk, IRC ?404(o)(2) amount not less than:

? FT, as if plan at risk; plus ? TNC, as if plan at risk; less ? Actuarial value of assets (unreduced by pre-funding

or carryover balances) ? IRC ?404(o)(2)(B) ? Cash balance plan allowing for immediate LS should

be able to use this rule to get deduction for full contribution in year 1

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Plans not at-risk

? At risk rules

? FT & TNC, determined in normal manner, but with additional assumptions, PLUS

? Load of $700 per participant added to FT ? Load of 4% of Non-at risk amt added to FT &

TNC ? Loads only if at risk 2 of prev. 4 years

? Application of loads to 404(o)(2)(B) rule? ? should be reasonable to add absent contrary guidance

? IRC ?? 430(i)(1)(A); 430(i)(1)(C); 430(i)(2) ? Reg ?? 1.430(i)-1(c)(2) ; 1.430(i)-1(d)(2)

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