PORTFOLIO

Employee Plans — Deductions, Contributions and Funding (Portfolio 371)

Tax Management Portfolio, Employee Plans — Deductions, Contributions and Funding, No. 371-5th, deals with the various limitations under §404 relating to deductions for contributions to qualified plans, the contribution and benefit limits imposed by §415 and the minimum funding rules of §412. The Portfolio also examines the application of §404 for contributions under nonqualified plans, the deduction rules of §419 for contributions to funded welfare benefit plans and the special rules of §404A for contributions to certain foreign deferred compensation plans.

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DESCRIPTION

Tax Management Portfolio, Employee Plans — Deductions, Contributions and Funding, No. 371-5th, deals with the various limitations under §404 relating to deductions for contributions to qualified plans, the contribution and benefit limits imposed by §415 and the minimum funding rules of §412. The Portfolio also examines the application of §404 for contributions under nonqualified plans, the deduction rules of §419 for contributions to funded welfare benefit plans and the special rules of §404A for contributions to certain foreign deferred compensation plans.


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AUTHORS

LYNN A. COOK
Lynn A. Cook, B.A. State University of New York at Fredonia (1981); J.D., Pace Law School (1984); Certificate in Employee Benefits Law, Graduate Division, Georgetown University Law Center (1993); LL.M. in Taxation with Distinction, Graduate Division, Georgetown University Law Center (1993); formerly with the Internal Revenue Service, Tax Exempt and Government Entities; member, Virginia and New York Bars.

CARL GOLDFIELD
Carl Goldfield, B.A., Northwestern University (1972); J.D., State University of New York at Buffalo (1975); LL.M. Taxation, Georgetown University Law Center (1981); member, Connecticut, New York, and District of Columbia Bars.

TABLE OF CONTENTS

Detailed Analysis

I. Introduction

A. In General

B. Qualified Plans

1. Internal Revenue Code Categories

a. Profit-Sharing Plans

b. Stock Bonus Plans

c. Pension Plans

(1) Defined Benefit Plans

(2) Money Purchase Plans

2. ERISA Categories

a. Defined Contribution Plans

b. Defined Benefit Plans

3. Other Categories

a. Target Benefit Plans

b. ESOPs

c. TRASOPs/PAYSOPs

d. Cash or Deferred Arrangements

e. Simplified Employee Pensions (SEPs)

f. Hybrid Plans

g. SIMPLE Plans

(1) In General

(2) SIMPLE Plans in IRA Form

(3) SIMPLE Plans in § 401(k) Plan Form

II. The Scope of § 404

A. Preemptive Effect of § 404

B. Deductions Allowable Under Sections Other Than § 404

1. Nondeferred Compensation and Expenses

2. Funded Welfare Benefit Plans

C. Qualified Plans - General Requirements

1. "Ordinary and Necessary" Test

a. In General

b. Employees of Subsidiaries

2. Necessity of a Qualified Plan

a. Nature of Qualification

b. Qualification Is Not Elective

3. Necessity of Payment

a. Time of Payment

b. Payment in Property

(1) Employer Stock

(2) Employer Notes and Checks

4. Necessary Characteristics of Recipient

a. Qualified Trust

b. Annuity Plans

c. Custodial Accounts

d. Foreign Situs Trusts

III. Deductions for Contributions to Profit-Sharing and Stock Bonus Plans

A. "Ordinary and Necessary" Test

1. Reasonable Compensation

2. Contributions from Profits

3. Affiliated Group Plans - "Make-Up Contributions"

B. Deduction Limits

1. Overview

2. Primary

a. In General

b. Compensation

(1) In General

(2) Self-Employed Persons

(3) Compensation for Disabled Employees

(4) Limitation on Compensation

3. Secondary

4. Retroactive Adjustment of Limits

5. Section 415 Limit

6. Leveraged ESOPs

C. Deduction Carryovers

1. During Continuance of Plan

2. After Plan Termination or Disqualification

D. Multiple Employer Plans

IV. Defined Benefit Pension Plans

A. "Costs" - Actuarial Methods

1. In General

2. Basic Concepts

a. Determining Costs - Present Value of Future Benefits

b. Normal Cost and Supplemental Liabilities

c. Spread Gain vs. Immediate Gain Cost Methods

d. Individual vs. Aggregate Cost Methods

e. Equation of Value

3. ERISA Approved Cost Methods

a. In General

b. Individual Level Premium Cost Method

c. Aggregate Cost Method and Individual Aggregate Cost Method

d. Entry Age Normal Cost Method

e. Unit Benefit Method

f. Attained Age Method

g. Frozen Initial Liability

B. "Ordinary and Necessary" Costs

1. Reasonable Compensation

2. Allocation of Multiple Employer Costs

3. Acceptable Actuarial Assumptions

4. Overstatement Penalty

C. Limitations on Deductions

1. In General

2. Limitation on Compensation

3. Application of Limits

4. Adjustments to § 412 Computations

5. Clause (i) Limit

6. Clause (ii) Limit

7. Clause (iii) Limit

a. In General

b. Establishment of Bases

(1) Experience Gain or Loss

(2) Actuarial Assumptions

(3) Past Service Liability

(4) Change in Funding Method

c. Limit Adjustments

d. Maintenance of Bases

e. Combining Bases

f. Interest on Normal Costs and Limit Adjustments

8. Full Funding Limitation

9. Current Liability Floor

10. Section 415 Limit

D. Plan Year for Determining Deductible Costs

1. Years to Which Costs Are Attributable

2. Short Taxable Years

E. Contribution Carryovers

1. Continuing Plans

2. Terminated Plans

F. Termination and Withdrawal Liability

G. Special Issues

1. Determination of Limits - Plans of Multiple Employers

2. "Split-Funded" Plans

3. Contributions Made "On Account of Past Service"

H. Deduction Limits for 2008 and Thereafter - Pension Protection Act of 2006

V. Money Purchase Pension Plan

A. Deduction Limitations

B. Carryover of Deductions

VI. Deductions to Combined Plans

A. No Common Employees

B. Common Employees

VII. Deductions for Contributions to Simplified Employee Pensions and SIMPLE Accounts

A. Simplified Employee Pensions (SEPs)

B. SIMPLE Retirement Plan Accounts

VIII. Deemed IRAs

IX. Uniform Capitalization and Long-Term Contract Rules

A. Uniform Capitalization

B. Long-Term Contracts

X. Penalty for Excess Contributions

A. In General

B. Exceptions and Special Rules

XI. Deductions for Other Types of Plans

A. Nonqualified Plans

1. In General

2. Foreign Severance Payment Plans

3. De Facto Plans

4. Nonemployee Participants of Nonqualified Plans

5. Unfunded Welfare Benefit Plans

B. Funded Welfare Benefit Plans

1. Background

2. In General

3. Welfare Benefits

4. Welfare Benefit Funds

5. Deduction Limits

a. Qualified Costs

b. Related Fund Year for Qualified Costs

c. Deduction for Qualified Direct Costs

d. Deduction for Additions to Qualified Asset Account

(1) In General

(2) Special Account Limits

(3) Actuarial Certification and Safe Harbors

(4) Post-Retirement Medical Benefit and Life Insurance

(5) Carryovers

(a) Exceptions to the Application of § § 419 and 419A

(b) Aggregation Rules

6. Effective Dates

7. Related Taxes

a. Tax on Disqualified Benefits

b. Unrelated Business Taxable Income and Deemed Unrelated Income

XII. Qualified Foreign Plans

A. In General

B. Qualified Funded Plan

C. Qualified Reserve Plan

D. Consistency Limits

E. Election as Change in Accounting Method

XIII. Minimum Funding Standards

A. In General

B. Funding Standard Account

1. In General

2. Charges to Account

a. Basic Costs

b. Experience Losses

c. Waived Funding Deficiencies

d. Current Liability Full Funding Limit

3. Credits to Account

a. Basic Costs

b. Experience Gains

c. Waived Funding Deficiencies

d. Full Funding Credit

4. Amortization Process

a. In General

b. Spread Gain vs. Immediate Gain Methods

c. Interest

d. Combining Charges and Credits

5. Special Rules

a. Reasonable Funding Methods

b. Reasonable Actuarial Assumptions

c. Valuations

d. Valuation of Assets

e. Changes in Funding Method

f. Changes in Plan or Trust Year

g. Social Security Changes

h. Funding Standard for Year of Termination

C. Special Charge for Large Plans (Other than Multiemployer Plans)

1. In General

2. Current Liability

a. In General

b. Special Service Rules for Current Liability

c. Unfunded Current Liability

3. Unfunded Old Liability Amount

4. Unfunded New Liability Amount

5. Unpredictable Contingent Event Amount

a. Unpredictable Contingent Event

b. Amount Added to Special Charge

6. Miscellaneous Rules of Operation

a. 100 Participants Determination

b. Interest Rates and Mortality Assumptions

c. Special Provisional Relief for Airlines

D. Installment Payments, Liquidity Requirements and Liens

1. Installment Payments

2. Liquidity Requirements

3. Liens

E. Alleviation of the Minimum Funding Requirements

1. In General

2. Waiver of Minimum Funding Standard

3. Extension of Amortization

4. Retroactive Plan Amendments

5. Alternative Minimum Funding Standard Account

6. Prohibition on Benefit Increases During Waiver or Amortization Extension Period or Retroactive Plan Amendment

7. Security for Waivers of Minimum Funding and Extension of Amortization

a. Security

b. Notice

8. Alternative Funding Schedule Election

a. Election for Relaxed Funding Rules

b. Election for Alternative Funding Schedule

(1) Accrual and Benefit Restrictions

(2) Minimum Required Contribution

(3) Plan Termination

F. Shortfall Method of Funding

G. Penalties

H. Exemptions

I. Minimum Funding Standards for 2008 and Thereafter - Pension Protection Act of 2006

1. Introduction

2. Minimum Required Contribution

a. Target Normal Cost

b. Funding Target and Shortfall Amortization Charges

c. Shortfall Amortization Base and Phase-in of Funding Target

d. Early Deemed Amortization Upon Attainment of Funding Target

3. Waiver Amortization Charges

4. Actuarial Assumptions for Target Normal Cost and Funding Target

a. Interest Rates

b. Mortality Table

c. Other Actuarial Assumptions

5. At-Risk Plans

6. Funding Standard Carryover Balance and Prefunding Balance

a. In General

b. Funding Standard Carryover Balance

c. Prefunding Balance

7. Timing Rules for Contributions

8. Excise Tax or Lien Due to Failure to Make Minimum Required Contributions

9. Funding Relief for Commercial Passenger Airlines

10. Effective Date

11. Annual Funding Notice

12. Limitations on Benefits

a. Shutdown and Unpredictable Contingent Event Benefits

b. Plan Amendments

c. Prohibited Payments

d. Severe Funding Shortfall

e. Notice Requirements

XIV. Individual Benefits Limits

Introductory Material

A. General Rules of Application

1. Plans to Which Limits Apply

2. Aggregating Plans

3. Limitation Year

B. Limitations on Defined Benefit Plans

1. General

2. Compensation

a. Definition

b. Safe Harbors

c. Timing for Accrued Compensation

3. Adjustments for Ancillary Benefits

a. Adjustment Exceptions

b. Excluded Benefits

4. Adjustments for Early and Late Retirement

5. Adjustment for Inflation

6. Multiple Annuity Starting Dates

7. Short Participation Employees

8. Special Rule for Small Benefits

9. Special Limit for Certain Collectively Bargained Plans

10. Post-Retirement Medical Accounts

11. Special Rules for Governmental Plans, Multiemployer Plans and Church Plans

C. Limitations on Defined Contribution Plans

1. In General

2. Compensation

3. Crediting of Annual Additions

4. Definition of Annual Additions

a. In General

b. Employer Contributions

c. Employee Contributions

d. Employee Contributions and Bankruptcy

e. Correcting Excess Annual Additions

5. Cost-of-Living Adjustments

6. Special Rules for ESOPs

7. Special Rules for Tax-Sheltered Annuities

8. Special Rule for Church Plans

9. Catch-Up Contributions

D. Disqualification

E. Limitations on Combinations of Plans Prior to 2000

1. In General

2. Defined Benefit Fraction

3. Defined Contribution Fraction

4. Special Rule for Tax Sheltered Annuities

5. Special Top-Heavy Rule

XV. Make-Up Contributions for Reemployed Veterans


WORKING PAPERS

Working Papers

Table of Worksheets

Worksheet 1 Pension and Retirement Plans - Cost of Living Adjustments

Worksheet 2 IRS Mortality Table For Plan Years Beginning Prior to January 1, 2008: Rev. Rul. 2001-62, 2001-2 C.B. 633

Worksheet 2A IRS Mortality Table For Plan Years Beginning on or After January 1, 2008: Rev. Rul. 2007-67, 2007-48 I.R.B. 1047

Worksheet 3 Guidance on EGTRRA Limitations on Benefits and Contributions under Qualified Plans:

Worksheet 4 Change in Funding Method: Rev. Proc. 2000-41, 2000-2 C.B. 371

Bibliography

OFFICIAL

Statutes:

Legislative History:

Treasury Regulations:

Treasury Rulings:

Cases:

UNOFFICIAL

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