Suppose you have a new plan with a 12/31/10 year end. The contribution will be funded 3/15/2011. The maximum contribution is the target normal cost. However, interest is applied to the minimum contribution from 1/1/11-3/15/11.
Can the company contribute the target normal cost or must they contribute the amount with interest for the first year?
Full Version: First Year Plan Maximum Contribution
The minimum appears to be always deductible (except for situations where the minimum exceeds earned income):
Sec. 404. Deduction for contributions of an employer to an
employees' trust or annuity plan and compensation under a
deferred-payment plan
(a) General rule
If contributions are paid by an employer to or under a stock
bonus, pension, profit-sharing, or annuity plan, or if compensation
is paid or accrued on account of any employee under a plan
deferring the receipt of such compensation, such contributions or
compensation shall not be deductible under this chapter; but, if
they would otherwise be deductible, they shall be deductible under
this section, subject, however, to the following limitations as to
the amounts deductible in any year:
(1) Pension trusts
(A) In general
In the taxable year when paid, if the contributions are paid
into a pension trust (other than a trust to which paragraph (3)
applies), and if such taxable year ends within or with a
taxable year of the trust for which the trust is exempt under
section 501(a) in the case of a defined benefit plan other
than a multiemployer plan, in an amount determined under
subsection (o), and in the case of any
other plan, in an amount determined as follows:
(i) the amount necessary to satisfy the minimum funding
standard provided by section 412(a) for plan years ending
within or with such taxable year (or for any prior plan
year), if such amount is greater than the amount determined
under clause (ii) or (iii) (whichever is applicable with
respect to the plan),
Sec. 412. Minimum funding standards
(a) Requirement to Meet Minimum Funding Standard.--
(1) In general.--A plan to which this section applies
shall satisfy the minimum funding standard applicable to the
plan for any plan year.
(2) Minimum funding standard.--For purposes of paragraph
(1), a plan shall be treated as satisfying the minimum funding
standard for a plan year if--
(A) in the case of a defined benefit plan which is
not a multiemployer plan, the employer makes
contributions to or under the plan for the plan year
which, in the aggregate, are not less than the minimum
required contribution determined under section 430 for
the plan for the plan year,
Sec. 404. Deduction for contributions of an employer to an
employees' trust or annuity plan and compensation under a
deferred-payment plan
(a) General rule
If contributions are paid by an employer to or under a stock
bonus, pension, profit-sharing, or annuity plan, or if compensation
is paid or accrued on account of any employee under a plan
deferring the receipt of such compensation, such contributions or
compensation shall not be deductible under this chapter; but, if
they would otherwise be deductible, they shall be deductible under
this section, subject, however, to the following limitations as to
the amounts deductible in any year:
(1) Pension trusts
(A) In general
In the taxable year when paid, if the contributions are paid
into a pension trust (other than a trust to which paragraph (3)
applies), and if such taxable year ends within or with a
taxable year of the trust for which the trust is exempt under
section 501(a) in the case of a defined benefit plan other
than a multiemployer plan, in an amount determined under
subsection (o), and in the case of any
other plan, in an amount determined as follows:
(i) the amount necessary to satisfy the minimum funding
standard provided by section 412(a) for plan years ending
within or with such taxable year (or for any prior plan
year), if such amount is greater than the amount determined
under clause (ii) or (iii) (whichever is applicable with
respect to the plan),
Sec. 412. Minimum funding standards
(a) Requirement to Meet Minimum Funding Standard.--
(1) In general.--A plan to which this section applies
shall satisfy the minimum funding standard applicable to the
plan for any plan year.
(2) Minimum funding standard.--For purposes of paragraph
(1), a plan shall be treated as satisfying the minimum funding
standard for a plan year if--
(A) in the case of a defined benefit plan which is
not a multiemployer plan, the employer makes
contributions to or under the plan for the plan year
which, in the aggregate, are not less than the minimum
required contribution determined under section 430 for
the plan for the plan year,
Thanks Andy
When the plan was set up they were so anxious to get going that they assured us the contribution would be funded as of December 31. So we gave them the target normal cost. Of course they changed their mind and will now fund by 3/15. We can go back and have them fund the contribution with interest, but it would be great if we did not have to. I will remind them of their original intention to fund as of December 31 but you know how sometimes clients develop amnesia over things like this.
It is interesting how the maximum contribution page from our admin system (latest update only) contains the following
at the bottom of the page:
Note: Interest that increases the minimum required contribution for
deposits made after the valuation date, MAY increase the Maximum
Deductible Contribution amount shown.
When the plan was set up they were so anxious to get going that they assured us the contribution would be funded as of December 31. So we gave them the target normal cost. Of course they changed their mind and will now fund by 3/15. We can go back and have them fund the contribution with interest, but it would be great if we did not have to. I will remind them of their original intention to fund as of December 31 but you know how sometimes clients develop amnesia over things like this.
It is interesting how the maximum contribution page from our admin system (latest update only) contains the following
at the bottom of the page:
Note: Interest that increases the minimum required contribution for
deposits made after the valuation date, MAY increase the Maximum
Deductible Contribution amount shown.
This question was posed in a workshop at the LA Benefits Conference last month. The facts were:
Val Date: 1/1/11
No Past Service Liability
Target Normal Cost: $60,000
At Risk Target Normal Cost: $62,000
Effective Rate is 6%
Date of Deposit: 9/15/2012
TNC with interest to 9/15/2012: $66,280
The question was asked, is the entire deductible limit $62,000 or $66,280. The IRS spokesperson stated that they have not worked on the actual 404 issue, but it is reasonable that a contribution that is required to be made, be deductible, therefore, the entire $66,280 would be deductible for the year.
To answer your question, they must always deposit the contribution with interest due, but based on the example above, the entire amount is deductible.
Val Date: 1/1/11
No Past Service Liability
Target Normal Cost: $60,000
At Risk Target Normal Cost: $62,000
Effective Rate is 6%
Date of Deposit: 9/15/2012
TNC with interest to 9/15/2012: $66,280
The question was asked, is the entire deductible limit $62,000 or $66,280. The IRS spokesperson stated that they have not worked on the actual 404 issue, but it is reasonable that a contribution that is required to be made, be deductible, therefore, the entire $66,280 would be deductible for the year.
To answer your question, they must always deposit the contribution with interest due, but based on the example above, the entire amount is deductible.
As I thought about your problem, I considered what about if you could only deduct the minimum as determined 1/1/2010 as you were considering In such case, you could have deducted part of the 3/15 contribution in 2010 and part (the interest) in 2011. That's all fine and dandy but you would be trapped if the client advanced the entire contribution in 2010. It would still be interested adjusted from 1/1/2010 so now you would have an unsatisfactorily resolvable dilemma.
QUOTE (JBones @ Feb 24 2011, 04:09 PM) 
This question was posed in a workshop at the LA Benefits Conference last month. The facts were:
Val Date: 1/1/11
No Past Service Liability
Target Normal Cost: $60,000
At Risk Target Normal Cost: $62,000
Effective Rate is 6%
Date of Deposit: 9/15/2012
TNC with interest to 9/15/2012: $66,280
The question was asked, is the entire deductible limit $62,000 or $66,280. The IRS spokesperson stated that they have not worked on the actual 404 issue, but it is reasonable that a contribution that is required to be made, be deductible, therefore, the entire $66,280 would be deductible for the year.
To answer your question, they must always deposit the contribution with interest due, but based on the example above, the entire amount is deductible.
Val Date: 1/1/11
No Past Service Liability
Target Normal Cost: $60,000
At Risk Target Normal Cost: $62,000
Effective Rate is 6%
Date of Deposit: 9/15/2012
TNC with interest to 9/15/2012: $66,280
The question was asked, is the entire deductible limit $62,000 or $66,280. The IRS spokesperson stated that they have not worked on the actual 404 issue, but it is reasonable that a contribution that is required to be made, be deductible, therefore, the entire $66,280 would be deductible for the year.
To answer your question, they must always deposit the contribution with interest due, but based on the example above, the entire amount is deductible.
So, we're in good shape so long as no one ever again poses this question and opens up the floor for a contradictory opinion!!!
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