This may be a dumb question, but I can't put my finger on anything.

A client adopts a 14.5% PS plan and a 10.5% Cash Balance Plan. Year 1 is not a problem, but due to asset losses, the year 2 Cash Balance contribution equals 12% of compensation. Normally this wouldn't be a problem, since the PS contribution is flexible, but the client (contrary to my advice) pre-funded the PS plan and put the14.5% in before the year was over. Since 12 + 14.5 > 25% I think they have a problem.

Is this a problem? Why can't the CB deduction be split between 2002 and 2003? Could they deduct the 14.5% PS and 10.5% of the CB for 2002 and then deduct the other 1.5% of the CB in 2003, along with the 2003 CB & PS (not > 25% of compensation)?

Are we assuming that the IRC 412 minimum for the cash balance plan is something less than the 10.5%?

Has there been an actual cash contribution to the CB plan, or just an "allocation"? If so, is any of it deposited in the following plan year?

Do plan year and company fiscal year coincide?

Plan year and fiscal year are both 12/31

For 2002 412 min = 404 max (no credit balance)
Nothing has been deposited into the Cash Bal. plan for 2002.

I think your fix is OK, but to ensure the deduction on 2003 return of the 1.5% 2002 plan year ctb, they should fund it after the due date of their 2002 tax return, so that it is a "includible employer contribution" under the 404 regs (see below).

FYI, Reg 1.404(a)-14(e):

(e) Special Computation Rules Under Section 404(a)(1)(a)(i)

(1) In General.

For purposes of determining the deductible limit under section 404(a)(1)(A)(i), the deductible limit with respect to a plan year is the sum of--

(i) The amount required to satisfy the minimum funding standard of section 412(a) (determined without regard to section 412(g)) for the plan year and

(ii) An amount equal to the includible employer contributions.

The term "includible employer contributions" means employer contributions which were required by section 412 for the plan year immediately preceding such plan year, and which were not deductible under section 404(a) for the prior taxable year of the employer solely because they were not contributed during the prior taxable year (determine with regard to section 404(a)(6)).

Right. I agree. Put part of it (the db) in time for minimum funding but after the time that it could be deducted for 2002. If the corporate tax return is extended to 9/15/2003, this no longer works, however.