Tax Planning with Single-Employer Qualified Plans

EXECUTIVE SUMMARY

• Contributions to qualified plans that otherwise qualify as ordinary and necessary business expenses are deductible under Sec. 404, subject to the limits of that section.
• At a plan level, the deduction for contributions to a defined-contribution plan is limited to 25% of the compensation paid to beneficiaries during the employer’s tax year.
• After 2007, the allowable deduction for contributions to defined-benefit plans is the greater of the minimum required contribution under the minimum funding standards or the sum of the funding target, the target normal cost, and the cushion amount for the plan year.
• Different limitations may apply where an employer maintains one or more defined-benefit plans and one or more defined-contribution plans.
• Employers are subject to a penalty tax under Sec. 4972 on nondeductible contributions.

One of the primary attractions of qualified retirement plans is tax leverage. If the rules are properly followed, the employer obtains a tax deduction for the contribution to the plan, while the employee is not taxed until he or she receives the dollars from the plan (assuming the plan remains tax qualified under Sec. 401(a)). In addition, under Sec. 501(a), the plan’s earnings are not taxed until distribution. This favorable tax treatment provides for powerful tax planning.

This article discusses the rules of Sec. 404 regarding the ability to deduct contributions to single-employer qualified retirement plans. It explains required contributions, and respective limitations, for tax deductible contributions to qualified retirement plans and outlines the requirements related to the timing of plan contributions.

General Rule

Sec. 404(a) begins, “If contributions are paid by an employer to a stock bonus, pension, profit-sharing, or annuity plan . . . such contributions shall not be deductible under this chapter; but, if they would otherwise be deductible, they shall be deductible under this section, subject, however, to . . . limitations as to the amounts deductible” (emphasis added).

This opening paragraph conveys two things:

1.Contributions to qualified plans are not deductible under Sec. 162 as ordinary and necessary business expenses; and

2. If such contributions otherwise meet the requirements of Sec. 162 (for example, they are reasonable), then they are deductible under Sec. 404(a), subject to the limits thereunder.

The limits of Sec. 404 vary depending on the type of plan or plans involved. The principal provisions of Sec. 404 discussed in this article include:

1. Sec. 404(a)(3) on deduction limits for contributions to defined-contribution plans;

2. Secs. 404(a)(12) and 404(l) on the definition of compensation;

3. Sec. 404(n) on the treatment of elective deferrals;

4. Sec. 404(a)(6) on the timing of payments;

5. Sec. 404(o) on deduction limits for contributions to defined-benefit plans for tax years beginning after 2007;

6. Sec. 404(a)(7) on deduction limits when the employer maintains one or more defined-benefit plans and one or more defined-contribution plans; and

7. Sec. 404(a)(8) on special limits in the case of self-employed persons.

Defined-Contribution Plans

A defined-contribution plan (that is, a profit-sharing, stock bonus, or money-purchase plan) is allowed a deduction of up to 25% of the compensation paid to beneficiaries of the plan during the employer’s tax year.¹ If the contributions are madeto two or more such plans, such plans shall be considered a single plan for purposes of applying the 25% limit.²

It is important to note that the 25% limit is a plan-level limit. That is, the allocation to any one participant under the plan is not limited to 25% of such participant’s compensation. Rather, Sec. 415(c)(1) provides for an individual limit of the lesser of the dollar limit ($46,000 for plan years ending in 2008)³ or 100% of the participant’s compensation for the year. (The dollar limit is increased by the amount of catch-up contributions, for individuals 50 years of age or older, available under Sec. 414(v), up to $5,000 for 2008.)⁴

Example 1: In 2008, Company A employs a workforce of 20 union employees and two nonunion employees (the owner and her spouse). Plan 1 covers all union employees and provides for a contribution of 10% of compensation. Union payroll totals $1 million. Plan 2 covers the owner and her spouse, each of whom receive an annual salary of $50,000. Total covered payroll is therefore $1.1 million, 25% of which is $275,000. The contribution to plan 1 is $100,000—that is, 10% of $1 million, leaving $175,000 available for plan 2. A contribution of $92,000 could be made to plan 2, $46,000 each for the husband and wife.

Compensation

The limitation on compensation⁵ is based on compensation paid during the employer’s tax year to the employees who, during that year, are beneficiaries of the funds accumulated under the plan. In Rev. Rul. 80-145⁶ the Service confirmed that the definition of compensation in the plan is not relevant for purposes of the previously mentioned limits.

Example 2: A calendar-year employer maintains a calendar-year profit-sharing plan that uses a traditional dual entry system. Employees who enter the plan mid-year receive an allocation based only on their compensation earned while participants in the plan. Nevertheless, for purposes of the 25% deduction limit, the individual’s compensation for the full year is included.

Example 3: An employer maintains a plan that defines compensation for allocation purposes as “base” compensation, therefore excluding overtime and bonuses. For deduction purposes, all compensation, including bonuses and overtime, is counted.

Compensation in excess of the Sec. 401(a)(17) limit—$230,000 for years beginning in 2008⁷—may not be considered for purposes of the deductible limits.⁸ Finally, compensation includes the following amounts not included in the employee’s income:⁹

• Amounts not included in the employee’s income under Sec. 402(g)(3) pertaining to amounts contributed to 401(k) plans, 403(b) arrangements, salary reduction simplified employee pension plans, and savings incentive match plans for employees;
• Amounts not included in the employee’s income under Sec. 125 pertaining to amounts contributed to cafeteria plans; and
• Amounts not included in the em-ployee’s income under Sec. 132(f)(4) pertaining to amounts contributed to qualified transportation fringe benefit plans.

Benefiting Participants

As indicated above, both the Code and the regulations limit the compensation that may be included to compensation paid to “beneficiaries under the plan.” In Rev. Rul. 65-295,¹⁰ the Service held that where a profit-sharing plan provided that a terminating employee did not participate in the allocation of the contributions in the year of employment termination, the compensation paid to the employee in that year was not included in the total compensation for purposes of determining the deduction limit.

The above rule seems relatively clear; if employees are not receiving an allocation, their compensation may not be considered. The ruling, however, was issued long before the advent of 401(k) plans.

Many 401(k) plans provide for numerous types of contributions—profit-sharing contributions, matching contributions, employee deferrals, etc. Where a profit-sharing contribution is made to such a plan for a year, clearly the compensation of those participants receiving an allocation of the contribution may be considered.

But consider the employees who do not receive a profit-sharing allocation (for example, due to a year-end employment requirement) but who elect to defer into the plan and, in doing so, receive a matching contribution. Again, it would seem clear that such employees’ compensation would be considered because they are receiving an allocation of employer contributions for the year.

It becomes less clear when the employee receives no employer dollars. Possibly, the employee has made elective deferrals, but the plan either does not provide for matching contributions or the employee has not satisfied a condition to receive a match (such as year-end employment). It would certainly appear that such a participant is a beneficiary of funds accumulated under the plan, albeit his or her own funds. Further guidance on this issue is needed from the IRS, which has given some conflicting answers to this question in informal settings.

Finally, what about employees who are eligible to defer, elect not to do so, and otherwise receive no allocations under the plan? Are such employees beneficiaries under the plan? Although logic might dictate that they are not, they are considered benefiting under the plan for purposes of the minimum coverage rules of Sec. 410(b). Again, definitive guidance from the IRS would be helpful in understanding this issue.

Elective Deferrals

Before the passage of the Economic Growth and Tax Relief Reconciliation Act of 2001, P.L. 107-16 (EGTRRA), elective deferrals were considered part of the employer contribution when determining the maximum deductible amount. EGTRRA added Sec. 404(n), which provides that post-2001 elective deferrals are not considered when determining the deductible limits under Sec. 404(a)(3).

In addition, EGTRRA added Sec. 404(a)(12), noted previously, which provides that compensation includes elective deferrals when determining the deductible limits under Sec. 404(a). Previously, only taxable compensation could be considered when determining the deductible limit.

Example 4: The only employees of JD, P.C., are J and D. During 2007, J and D receive salaries of $180,000 and $56,000, respectively. Total compensation is therefore $236,000, such that a deduction of up to $59,000 (25% of $236,000) may be taken for employer contributions made to the JD 401(k) profit-sharing plan. J and D are both over age 50, so each may make elective deferrals of $20,500 to the plan. For 2007, total allocations under the plan could be as shown in Exhibit 1.

See Exhibit 1

Different Plan Year and Tax Year

Recall from the previous discussion that the 25% deduction limit is based on compensation paid during the employer’s tax year. When the plan year and the tax year are not the same, it is necessary to ensure that this limitation is met. (As discussed in more detail below, plan contributions are deductible in a tax year if paid no later than the due date of the tax return, including extensions.)

Example 5: ABC Corp., with a June 30 tax year, maintains a profit-sharing plan with a December 31 year end. For the tax year ended June 30, 2007, participant payroll totaled $600,000. ABC’s profit-sharing contribution for the 2006 plan year, contributed at such a time that it is deductible on the June 30, 2007, tax return, was $100,000.

ABC extends its June 30, 2007, tax return to March 15, 2008. If deposited by this extended due date, $50,000 of ABC’s profit-sharing contribution for the 2007 plan year could also be deducted on the June 30, 2007, tax return. (See, however, the following discussion regarding matching contributions pertaining to post-tax-year-end 401(k) contributions.)

Timing of Payments

Sec. 404(a)(3) provides that plan contributions are deductible “in the taxable year when paid.”¹¹ Under Sec. 404(a)(6), however, a taxpayer is deemed to have made a payment on the last day of the preceding tax year if the payment is “on account of” that tax year and is made not later than the time prescribed by law for filing the return for that tax year (including extensions).

To take advantage of the grace period under Sec. 404(a)(6), Rev. Rul. 76-28¹² imposes the following conditions:

1.Sec. 404(a)(6) applies whether the taxpayer is on the cash or accrual method of accounting and whether or not the conditions for accrual otherwise generally required of accrual-basis taxpayers have been met.¹³

2. The plan must treat the payment in the same manner that a payment actually received on the last day of the employer’s preceding tax year would be treated.

3. One of the following conditions is satisfied:

• The employer designates the payment in writing to the plan administrator or trustee as a payment on account of the employer’s preceding tax year; or
• The employer claims the payment as a deduction on its tax return for the preceding tax year (or, in the case of a contribution by a partnership on behalf of a partner, the contribution is shown on Schedule K, Partners’ Distributive Share Items, of the partnership tax return for that year).

A payment may be designated as a payment on account of the preceding tax year in the manner provided above at any time on or before the due date (including extensions) of the tax return for that year. Therefore, if the return was first filed without taking such a deduction, an amended return may be filed claiming the deduction as long as it is filed before the extended due date (or the original due date if no extension was obtained). However, once a payment has been designated or claimed on a return in the manner provided above as being on account of a preceding tax year, the employer may not retract or change such a designation or claim.

Example 6: Employer X, a calendar-year taxpayer, maintains a profit-sharing plan that also has a calendar year end. X’s 2006 tax return was extended to September 15, 2007. On June 15, 2007, X files its tax return, claiming a deduction for a profit-sharing contribution for its 2006 plan year, and makes the contribution shortly thereafter. While doing some 2007 tax planning in early September 2007, X determines that the deduction would be better on the 2007 tax return. X may not amend its 2006 return and remove the profit-sharing deduction.

Example 7: Assume instead that X determined that it would not make a profit-sharing contribution for 2006 and filed its 2006 tax return on June 15, 2007, claiming no deduction. In early September 2007, X decided that it would like to make a profit-sharing contribution for 2006 after all. This is permissible as long as the contribution is made and the amended return is filed by September 15, 2007.

It should be noted that Rev. Rul. 76-28 does not require a board resolution before the end of the tax year (or at any time) in order for a contribution to be deductible. The noted requirements are the sole requirements.¹⁴

In addition, if a company files its tax return before the original due date but after obtaining an extension of time for filing, the due date under Sec. 404(a)(6) is the extended due date.¹⁵ Conversely, an extension is not valid when the return is filed before the original due date and before filing for the extension.¹⁶ It is therefore not necessary to make a contribution before filing the tax return, as long as it is made by the tax return’s due date (including valid extensions).

On the other hand, the plan must exist before the end of the year. In the case of Engineered Timber Sales, Inc.,¹⁷ the Tax Court ruled that the plan and trust must be in existence and executed before the end of the employer’s tax year in order for a deduction to be taken.

The IRS reiterated this in Rev. Rul. 81-114.¹⁸ The Service also ruled in Rev. Rul. 81-114 that if, under local law, a valid trust has been created by the end of the tax year except for the existence of corpus, the trust will be deemed to be in effect if the corpus is furnished (that is, the plan is funded) no later than the due date (including extensions) of the employer’s tax return. Accordingly, contrary to popular opinion, it is not necessary to open an account for the trust before the end of the tax year; it is simply necessary that the documents are properly executed.

Acceleration of 401(k) Deductions

Rev. Ruls. 90-105¹⁹ and 2002-46²⁰ dealt with an employer maintaining a calendar-year 401(k) plan that provided for matching contributions, as in the following example:

Example 8: M Corp. maintains plan X, which includes a 401(k) arrangement providing for matching contributions. M’s tax year ends on June 30, and plan X has a December 31 plan year. Plan X provides for M’s board of directors to set a minimum contribution for a plan year, to be allocated first toward elective deferrals and matching contributions, with any excess to be allocated to participants as of the end of the plan year in proportion to compensation earned during the plan year. M’s board of directors adopted a resolution on June 15, 2001, setting a minimum contribution of $8 million for the 2001 calendar plan year.

By December 31, 2001 (the last day of plan X’s 2001 calendar plan year), M had contributed $8 million to X. This amount consisted of (1) $3.8 million for elective deferrals and matching contributions attributable to compensation earned by plan participants before the end of M’s June 30, 2001, tax year (pre-year-end service contributions), and (2) $4.2 million for elective deferrals and matching contributions attributable to compensation earned by plan participants after the end of the tax year (post-year-end service contributions). M made each contribution to X at the same time that the related wages were paid.

M received an extension of time to March 15, 2002, to file the income tax return for its June 30, 2001, tax year. On this return, M claimed a deduction for the entire $8 million for elective deferrals and matching contributions made to X during X’s 2001 calendar plan year. The total amount contributed and claimed by M as a deduction did not exceed the percentage limitations of Sec. 404(a)(3)(A)(i).

The Service pointed to the requirement under Rev. Rul. 76-28 that an amount deposited after the end of the tax year is deductible in the previous year only if the plan treats the deposit in the same manner that a payment received on the last day of the corporation’s tax year is treated. The Service ruled that the plan could not have done so because compensation cannot be deferred and contributed to a plan as elective deferrals, and matching contributions cannot be made regarding those elective de-ferrals, until the underlying compensation has actually been earned. Accordingly, only the $3.8 million pertaining to the pre-year-end service contributions was deductible on the June 30, 2001, tax return.

Carryover

Amounts paid in a tax year in excess of the amount deductible under Sec. 404(a)(3) are deductible in succeeding tax 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 that year.²¹

Defined-Benefit Plans

Under Sec. 404(o), for tax years beginning after 2007,²² the maximum deductible contribution for a defined-benefit plan is the greater of:

1. The contribution required under Sec. 430 (setting minimum funding standards); or

2. The sum of:

• The funding target for the plan year;
• The target normal cost for the plan year; and
• The cushion amount for the plan year

over the value (determined under Sec. 430(g)(2)) of the plan’s assets that are held by the plan as of the valuation date for the plan year.

The funding target is basically the present value of benefits earned under the plan as of the first day of the plan year, and the target normal cost is the present value of benefits earned during the plan year (including increases due to average compensation increases).

Under Sec. 404(o)(3), the cushion amount for the plan year is the sum of:

1. 50% of the funding target; and

2. The amount by which the funding target would increase if the plan were to take into account increases in compensation expected to occur in future years. Except in the case of plans covered by the Pension Benefit Guaranty Corporation (PBGC), such projected increases may not cause the limitations of Sec. 415(b) to be exceeded.

In determining the cushion amount, plan amendments within the previous two years that increase benefits for highly compensated employees may not be taken into account in the case of plans with fewer than 100 participants. In determining the number of participants, all defined-benefit plans maintained by the same employer (or member of the employer’s controlled group) are treated as one plan. However, only the participants of the member or employer are taken into account.²³

Multiple Plans

Sec. 404(a)(7) sets forth an additional set of limitations that could apply where an employer maintains one or more defined-benefit plans and one or more defined-contribution plans. Under Sec. 404(a)(7)(A), the total amount deductible in a tax year under such plans may not exceed the greater of:

• 25% of the compensation paid during the tax year to the beneficiaries under the plans; or
• The amount of contributions made to the defined-benefit plan(s) to the extent that such contributions do not exceed the amount necessary to satisfy the minimum funding standard with respect to the defined-benefit plan(s) for the plan year ending with or within that tax year (or for any prior plan year).

These rules apply where both of the following exist:

• The employer contributes to both a defined-benefit plan and a defined-contribution plan for the same tax year;²⁴ and
• At least one employee is a beneficiary under both plans.²⁵

Additionally, for tax years beginning after 2005, the Pension Protec-tion Act of 2006, P.L. 109-280, added Sec. 404(a)(7)(C)(iii). This section provides that, in the case of employer contributions to one or more defined-contribution plans, the 25% limit applies only to the extent that such contributions exceed 6% of the compensation paid during the tax year to the beneficiaries of the defined-contribution plans. In Notice 2007-28,²⁶ the IRS concluded that the language of Sec. 404(a)(7)(C)(iii) increases the limitation from 25% to 31% where contributions to the defined-contribution plans exceed 6% of compensation. That is, per Q&A-8 of the notice, the first 6% of contributions to defined contribution plans is effectively ignored when applying the 25% limit.

Further, for tax years beginning after 2007, if the defined-benefit plan is covered by the PBGC, the limits do not apply.²⁷

In determining whether one or more employees is a beneficiary under both a defined-benefit plan and a defined-contribution plan, the rules under Rev. Rul. 65-295, discussed previously, serve as a starting point. That is, in order to be considered a beneficiary under the defined-contribution plan, a current allocation must be made to the employee’s account balance.

Example 9: Employer X maintains plan A, a profit-sharing plan covering all 10 of its employees. Beginning in 2007, X amends the plan to preclude further allocations for five of the plan participants. These five will be participants in a newly formed defined-benefit plan. The other five participants in plan A will continue to receive profit-sharing contributions under that plan and will be excluded from participation in the defined-benefit plan. X’s deduction for contributions to the two plans for 2007 will not be limited to 25% of compensation because no employee benefits under both plans in 2007.

If this situation were reversed, it is likely that the IRS would impose the limit. That is, if a defined-benefit plan is amended to freeze benefits for some participants, and those participants then receive contributions under a defined-contribution plan, the IRS could argue that those participants are beneficiaries under both plans. The logic here would be that funding defined-benefit plans is not simply done on a year-to-year basis. Rather, contributions made during a given year cover all liabilities under the plan: past, present, and, to some extent, future.

Example 10: Employer X maintains plan B, a defined plan covering all 10 of its employees. Beginning in 2007, X amends plan B to preclude further benefit accruals for five of the plan participants. These five will be participants in a newly formed profit-sharing plan. The other five participants in plan B will continue to earn benefit accruals under that plan and will be excluded from participation in the profit-sharing plan. X’s deduction for contributions to the two plans for 2007 likely will be limited to 25% of compensation.

Now consider a set of examples applying the previously discussed rules to a hypothetical medical practice. Each of the examples provides for an allocation of contributions and an accrual of benefits that is nondiscriminatory under Sec. 401(a)(4) and the regulations thereunder. The employees of the practice are O, the owner-physician, E, an employee-physician, and six staff members (see the employee census in Exhibit 2).

See Exhibit 2

With a compensation total of $605,000, the deduction limit is $187,550 (31% of $605,000) where the combined plan limit applies. Also, the combined plan limit will not apply where the total allocations to the defined-contribution plan do not exceed $36,300 (6% of $605,000).

Note that for ease of illustration the staff employees are presumed not to elect to defer any of their own dollars into the 401(k) portion of the plan. If any of the staff decided to do so, it would have no effect on the results.

Example 11: The medical practice maintains a safe-harbor 401(k) plan using the 3% nonelective contribution. It provides additional profit sharing to (1) maximize O’s contribution, (2) provide each staff employee participant a contribution of 7% of compensation, and (3) provide E a contribution of 2% of compensation. The total of the safe-harbor and profit-sharing amounts is shown in Exhibit 3 in the column “PS + SH.” The practice also maintains a cash balance defined-benefit plan providing contribution credits of 60% of compensation, not to exceed $125,000, for O and 5% of compensation, not to exceed $1,000, for the staff. E is excluded from participation in the defined-benefit plan. (Amounts are indicated in the column “DB.”) The results are shown in Exhibit 3.

See Exhibit 3

Because employees participate in both plans and the employer contribution to the profit-sharing plan exceeds 6% of compensation, the 25% limit applies, but only to the extent that the contributions to the defined contribution plan exceed 6% of compensation. As previously indicated, this limit is $187,550 and is therefore met in the above scenario.

Example 12: The medical practice maintains a safe-harbor 401(k) plan using the 3% nonelective contribution to staff only. Additional profit sharing provides (1) $6,000 to O, (2) a contribution of 9% of compensation to each staff employee participant, and (3) a contribution of 5% of compensation to E. The practice also maintains a cash balance defined-benefit plan providing contribution credits of 85% of compensation, not to exceed $185,000, for O and 5% of compensation, not to exceed $1,000, for the staff. E is excluded from participation in the defined-benefit plan. The results are shown in Exhibit 4.

See Exhibit 4

Since the employer contribution to the profit-sharing plan does not exceed 6% of compensation, the Sec. 404(a)(7) 25% limit does not apply to the defined-contribution or the defined-benefit plans.²⁸

Self-Employed Persons

Sec. 404(a)(8)(C) limits the deduction on behalf of a self-employed person to that person’s earned in-come (determined before plan contributions) from the trade or business establishing the plan. This limitation precludes a deduction in the case of the minimum funding required for a defined-benefit plan to the extent that minimum funding exceeds the earned income.

Example 13: X has practiced as a physical therapist for three years as a sole proprietor. She has maintained no qualified plan and has an average annual earned income over the period of $50,000. In her fourth year, X adopts a defined-benefit plan, which calls for a benefit of 100% of average pay, based on all years of service. Assume that a level cost funding method calls for a $40,000 annual contribution. If in year 4 or some later year X has earned income of less than $40,000, the entire contribution may not be deductible.

Under Sec. 401(c)(2), the term “earned income” means the net earnings from self-employment,²⁹ but such net earnings are determined:

• Only with respect to a trade or business in which personal services of the taxpayer are a material income-producing factor;³⁰
• With regard to the deductions for qualified plans or simplified employee pension plans for self-employed persons and their common-law employees;³¹ and
• With regard to the deduction for one-half the self-employment tax allowed to self-employed persons by Sec. 164(f) (not the “in lieu of” deduction allowed by Sec. 1402(a)(12)).³²

Nondeductible Contributions

Sec. 4972 imposes a penalty tax³³ on the employer equal to 10% on “nondeductible contributions.” Under Sec. 4972(c) (and the instructions to Form 5330, Return of Excise Taxes Related to Employee Benefit Plans), the term “nondeductible contributions” means the sum of:

1. The excess (if any) of the amount contributed by the employer during the tax year over the amount allowable as a deduction under Sec. 404, plus

2. The excess for the preceding tax year reduced by the sum of:

• The portion of the previous year excess returned to the employer during the current tax year, and
• The portion of the previous year excess deductible under Sec. 404 for the current year.

In determining the amount deductible under Sec. 404 for the current year, carryover contributions are deducted before current-year contributions.³⁴

The tax is not imposed on a self-employed person to the extent that the required contribution to that person’s defined-benefit plan exceeds earned income (and therefore is not deductible under Sec. 404(a)(8)(C)).³⁵

Under Sec. 4972(c)(6), contributions to one or more defined-contribution plans that are not deductible because they exceed the combined plan limits of Sec. 404(a)(7) are not subject to the tax to the extent that they do not exceed employer matching contributions made to a 401(k) plan.

Conclusion

In order to remain competitive in the labor market, more employers are offering qualified retirement plans to their employees. While single-employer qualified plans offer employers the benefit of a current deduction for contributions to a plan, determining a specific employer’s deduction for contributions to a qualified plan for a tax year can be complex. In order to properly advise clients (especially less-sophisticated small business clients), CPAs should be well versed in the basic rules regarding the amount and timing of deductible contributions to qualified plans.

For more information about this article, contact Mr. Donovan at kdonovan@pinnacle-plan.com.

EditorsNote: This article is adapted from Lesser, ed., The CPA’s Guide to Retirement Plans for Small Businesses, 2d ed. (AICPA, 2007). To order, or for more information, call 1-888-777-7077 or visit www.cpa2biz.com.

¹ Sec. 404(a)(3)(A)(i)(I).

² Sec. 404(a)(3)(A)(iv).

³ Notice 2007-87, 2007-45 IRB 966.

⁴ Id.

⁵ Under Regs. Sec. 1.404(a)-9(b).

⁶ Rev. Rul. 80-145, 1980-1 CB 89.

⁷ Notice 2007-87, 2007-45 IRB 966.

⁸ Under Sec. 404(l).

⁹ Sec. 404(a)(12).

¹⁰ Rev. Rul. 65-295, 1965-2 CB 148.

¹¹ Similar language is found in Sec. 404(a)(1) pertaining to defined-benefit plans.

¹² Rev. Rul. 76-28, 1976-1 CB 106.

¹³ In Field Service Advice 199922005 (2/1/99), the IRS affirmed that the all-events and economic-performance tests of Sec. 461 did not need to be met before deducting plan contributions.

¹⁴ See also IRS Letter Ruling 8010123 (12/17/79).

¹⁵ Rev. Rul. 66-144, 1966-1 CB 91, and Rev. Rul. 84-18, 1984-1 CB 88.

¹⁶ IRS Letter Ruling 8336006 (5/26/83).

¹⁷ Engineered Timber Sales, Inc., 74 TC 808 (1980).

¹⁸ Rev. Rul. 81-114, 1981-1 CB 207.

¹⁹ Rev. Rul. 90-105, 1990-2 CB 69.

²⁰ Rev. Rul. 2002-46, 2002-2 CB 117.

²¹ Sec. 404(a)(3)(A)(ii).

²² Significant changes were made to the rules in Sec. 404 for determining the deductible amount for defined-benefit plans after December 31, 2007, by the Pension Protection Act of 2006, P.L. 109-280. See Donovan, “Deduction Issues,” in Lesser, The CPA’s Guide to Retirement Plans for Small Businesses, p. 235, for a discussion of the pre-2008 rules.

²³ Sec. 404(o)(4).

²⁴ Sec. 404(a)(7)(A).

²⁵ Sec. 404(a)(7)(C)(i).

²⁶ Notice 2007-28, 2007-1 CB 880.

²⁷ Sec. 404(a)(7)(C)(iv).

²⁸ In Notice 2007-28, Q&A-9, the IRS initially took the position that the limit would apply to a defined-benefit plan. It reversed its position in anticipation of a technical correction to Sec. 404(a)(7) that is included in legislation that was introduced in August 2007 (H.R. 3661 and S. 1974). See Letter to Rep. McCrery from Asst. Treasury Secretary Solomon, 2007 TNT 182-54, Doc. No. 2007-21289 (September 13, 2007).

²⁹ As defined in Sec. 1402(a).

³⁰ Sec. 401(c)(2)(A)(i).

³¹ Sec. 401(c)(2)(A)(v).

³² Sec. 401(c)(2)(A)(vi).

³³ Reported on Form 5330.

³⁴ Sec. 4972(c)(2).

³⁵ Sec. 4972(c)(4).