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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.

http://www.law.cornell.edu/uscode/text/26/415

http://www.law.cornell.edu/uscode/text/26/usc_sec_26_00000415----000-

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


• 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?


• 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


• 404(o) regs

•

•

•

•

•

•

•

• (cue crickets)


• 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.


• 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.


• 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?


• 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.


• 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?


• 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


• 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)]


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)


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)


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??


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)


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)


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


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)


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 401(k) Total

Dr. A $ 255K 56 $ 63,150 $ 33,500 $ 96,650 $ 23,000 $ 119,650

Dr. B 255K 56 63,150 33,500 96,650 23,000 119,650

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 $120,000 $ 78,200 $207,700 $ 46,000 $ 253,700

Small Medical Group P.C.


• 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



Earnings Age DB

Profit

Sharing

& SH

Total


Dr. A $ 255K 56 $ 45,550 $ 33,500 $ 79,050 $ 23,000 $ 102,050

Dr. B 255K 56 45,550 33,500 79,050 23,000 102,050

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 $ 94,300 $ 75,000 $169,300 $ 46,000 $ 215,300



• DC plan: 3% non-elective safe harbor 401(k) PLUSprofit sharing as follows:– Owners – max





• 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


Dr. A $ 255K 56 $185,000 15,300 $200,300 $ 23,000 $ 223,300

Dr. B 255K 56 185,000 15,300 200,300 23,000 223,300

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 $373,200 $ 46,600 $419,800 $ 46,000 $ 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





• 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 year-

end 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 year-

end 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 DBplan made after year-end but prior to extended duedate of tax return (and minimum funding deadline) as1988 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 inabove manner

Year Deductible

• Note that with contribution considered 404contribution for subsequent year, limits of §404for 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 requirethat contribution be excluded from assets whendetermining 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 77-

82) 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?


• 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


• Example


– 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)


• Example


– 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


• 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 12-

month PY in proportion to number of months of

short PY


• 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


• 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


• 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 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


• 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)

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