Excise tax on single employer non-deductible contributions

[JustMe]

IRC 4972(c)(7) says that an employer may elect to not take into account any contributions to a defined benefit plan to the extent they exceed the full-funding limit. What does that mean?

My notes say that all single employer DB plans are exempt from excise tax on non-deductible contributions.

[jmelbye]

Not sure what that statement means, but I'll spew out what I know about the topic.

Multi-ER max deduction:

1. smaller of:
404(a)(1)(A)
(i) MRC
(ii) Some bit about making up for unfunded and current credits. Farber said ignore
(iii) NC + Limit Adjustment

2. But no greater than FFL

3. or, if greater
404(a)(1)(D)
140% Current liability - AVA (not reduced by CB)

Notes:
- The FFL limit can limit the amount determined under 404(a)(1)(A), but it does not increase it.
- The 404(a)(1)(D) part is not subject to the FFL (Farber mentioned this is because the FFL being a limit was introduced in regs, but prior to the existence of 404(a)(7), which was later amended into the code. I think I got that right, helps me remember if I should hit it up with the FFL limit or not.)
- Generally, the excise tax is on any amount over the limit determined above, however, contributions up to the FFL are never taxed. So you could have a situation where your max deductible limit was say 100,000, and the FFL was 150,000. If you contributed 200,000, you would only pay tax on the 200,000 - 150,000 = 50,000, and you would only be able to deduct 100,000. That 50,000 in between is stuck in no-man's land. There was a 2007 problem like this.

And I've also been told what you said about single employer. No excise tax, ever.

There are more things to consider like DB + DC combined limits under 404(a)(7), and includible contributions necessary to satisfy last year's MRC, but I won't get into those, I'm probably getting further and further away from the question you were asking.

[JustMe]

I wonder why we needed to know that the 10% excise tax applies to both single and multi employer plans, when there's no excise tax on single employer undeductible contributions. Probably has to do with new regs.. that it used to be 10% for SEP, but doesn't apply any more.

[davefarber]

Originally Posted by JustMe

IRC 4972(c)(7) says that an employer may elect to not take into account any contributions to a defined benefit plan to the extent they exceed the full-funding limit. What does that mean?

My notes say that all single employer DB plans are exempt from excise tax on non-deductible contributions.

This section was amended under PPA -- prior to PPA it said that for defined benefit plans, all non-deductible contributions up to the ERISA full funding limit were exempt from the 10% excise tax. This applied to both single and multiemployer plans. Since there is no longer a full funding limit for single employer plans under PPA, the section was amended so that the exemption (up to the ERISA full funding limit) only applies to multiemployer plans. What was strange is that the section was also re-worded so that it now appears that all non-deductible contributions to single employer plans are exempt from the 10% excise tax. I expected that this was a mistake (I find it hard to follow the reasoning that Congress would have used to make such a broad exemption), but nothing was changed in technical corrections, so for now, the exemption seems to stand. Note that 4972(c)(7) can only be used for a year if the employer does not elect to use 4972(c)(6) with regard to an excise tax exemption for the DC plan where contributions are not deductible due to the combined deduction limit of 404(a)(7).