EP Abusive Tax Transactions - 401(k) Accelerated Deductions


The IRS has identified 401(k) accelerated deductions (deductions for contributions of an employer to an employee's trust or annuity plan and compensation under a deferred payment plan) as listed transactions. The following revenue rulings discuss this issue.

Where the contributions are attributable to compensation earned by plan participants after the end of the taxable year, taxpayers have sought to deduct contributions to qualified cash or deferred arrangements (Section 401(k) plans) or matching contributions using the grace period provided by Section 404(a)(6). Section 404(a)(6) provides that plan contributions may be deemed to have been made on the last day of the preceding taxable year if made "on account of" such taxable year and if made not later than the time prescribed by law for filing the return for such taxable year (including extensions).

Revenue Ruling 90-105 PDF
This revenue ruling provides that compensation cannot be deferred and contributed to a plan as elective deferrals, and matching contributions cannot be made to a plan with respect to such elective deferrals, until the underlying compensation has been earned. This holding applies regardless of whether section 404(a)(6) deems the contributions to have been paid on the last day of the taxable year, and regardless of whether the employer uses the cash or accrual method of accounting.

Revenue Ruling 2002-46 PDF
The transaction described in this revenue ruling is identical to the transaction in Revenue Ruling 90-105 except that (1) the plan was amended to provide for the employer's Board of Directors to set a minimum contribution for a plan year to be allocated first toward elective contributions and matching contributions and (2) the Board of Directors adopted such a resolution before the end of the employer's taxable year. This revenue ruling provides that these factual differences from Revenue Ruling 90-105 do not change the result.

Revenue Ruling 2002-73 PDF
This revenue ruling modifies Revenue Ruling 2002-46 for taxpayers electing to change method of accounting to comply with that revenue ruling.