EA-2A: Deductible Limit question.

[yeppers-wsmn]

You know how you can increase the DB deductible limit based on the 412 minimum with "includible employer contributions" ie. deductible contributions made for the prior year, but not deducted because made after the corporate taxes were filed. (reg. 1.404(a)-14(e)(1)(ii)).

An example of this is in the 2000 EA-2 exam, #39.

My questions is this: Do non-deductible contributions made in the prior year in any way increase the current year deductible limit? And if not, if an employer wishes to deduct them in the current year, can they? and would that actually reduce the current year deductible limit?

I can't seem to find any examples of this and have never run across it in "real life".

[WWSituation]

yep, here is my stab:

The current year deductible limit increases to the extent that prior year non-deductible contributions (i.e. paid after filing deadline) can be used toward last years minimum.

i.e.

Calendar Plan Year and Tax Year
2000 Minimum Required = $50,000
Payment for 2000 Plan year made on 9/15/01 (no extention filed) = $60,000

2001 NC + 10YearLimitAdj. = $60,000

Assume FFL and RPA UCL are not applicable.

The deductible contribution for 2001 would be $110,000:
$60,000 from current year deductible limit and
$50,000 to deduct last years minimum required contribution

The carryover at 1/1/2001 (from 2000) would be $10,000

Agree?? Anybody??

[yeppers-wsmn]

A few issues:

#1 The current year deductible limit increases to the extent that prior year non-deductible contributions (i.e. paid after filing deadline) can be used toward last years minimum.


WW, I think all contributions up to the minimum are deductible. Unless we're talking about a sole-proprietor, in which the minimum may not be totally deductible due to the Earned Income limit.

#2 2001 NC + 10YearLimitAdj. = $60,000

Assume FFL and RPA UCL are not applicable.

The deductible contribution for 2001 would be $110,000:
$60,000 from current year deductible limit and
$50,000 to deduct last years minimum required contribution


I don't think you can add the $50000 from last year's undeducted contribution to this amount. You can only add that to the 2001 deductible limit based on the 2001 minimum calculation (IRC 404(a)(1)(A)(i)).



What I'm referring to are contributions that exceed the prior year deductible limits...

Following your example.. Say the 2000 minimum is $50,000, but add that the deductible limit was $55,000.

The contribution for 2000 of $60,000 was made after the taxes were filed, and therefore not deducted in 2000.

Now, say the 2001 deductible limit calculations look like this..
2001 minimum = $55,000
2001 NC + "Limit Adjustment" = $70,000.

So the 2001 deductible limit would be 105,000. (55,000 + 50,000).

Now this is my question. How is the $10,000 that's left over from last year's contribution treated. Is it subtracted from the 105,000 to make the the contribution that's deductible this year only $95,000?

[Woodrow]

Yep: I agree with your comment about only adding $50,000 to this year's min. Since the question on the 2000 exam was aggregate, it was easy to overlook that.

I agree with your math in your example, but I think I would phrase it differently. I would say that the deductible limit for 2001 is $105,000. The $60,000 is a contribution for the 2000 plan year, but is a 2001 tax year contribution, and so none of it is non deductible, and you are left with 105 - 60 = $45,000 you can still deduct.

This works out to the same numbers you had since you said the $105 was reduced by the extra $10, but then you would also deduct the other $50, leaving you with $45 more you can still deduct.

So, thinking about 404 by itself, it makes sense to me that these are all 2001 contribs, and none are non deductible. Now if we want to compare, 412 calculations with 404 calculations in this situation, that's where my head starts to hurt.

[yeppers-wsmn]

Woodrow, thanks. I think that makes sense.

That made me think of something else though. Can a contribution that is made during 2000 that is over the deductible limit be counted as a deductible contribution in 2001.

For example:

2000 Deductible limit: $50,000
2000 contribution (made 12/31/2000): $75,000
Non-deductible amount for 2000: $25,000
Excise tax for 2000: $2,500.

2001 Deductible limit:$50,000

Can you take a deduction in 2001 for the excess of $25,000 made in 2000? Or is that contribution just included in the assets (and credit balance) going forward, and forgotten about for deductible limit/contribution calculations?

The more I think about this the weirder it looks. Hopefully they won't ask anything like this.

[yeppers-wsmn]

Can you take a deduction in 2001 for the excess of $25,000 made in 2000? Or is that contribution just included in the assets (and credit balance) going forward, and forgotten about for deductible limit/contribution calculations?


I think I just found my answer. 404(a)(1)(E): Carryover. Any amount paid in a taxable year in excess of the amount deductible in such year under the foregoing limitations shall be deductible in succeeding taxable years in order of time to the extent of the difference between the amount paid and deductible in each such succeeding year and the maximum amount deductible for such year under the foregoing limitations.

Yeah, that's straightforward. Who writes this S***?

Looks like the $25,000 carryover in my example can be deducted in 2001 and would be subtracted from the deductible limit to calculate the remaining deductible contribution that can be made.

:shake:

[Chilango]

You are right the way the deduction works. One more thing about carryover contributions - leave them in the assets when you calculate the full funding limitation for the minimum contribution, but subtract them from the assets when you calculate the FFL for the maximum deductible contribution. It wouldn't be fair to leave them in the maximum FFL calculation when the plan sponsor didn't get the deduction for them.