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Nondeductible Contributions to Defined Benefit Plans

Issue Title:

Nondeductible contributions to defined benefit plans

Description:

A sponsor of a defined benefit plan may elect not to have the 10% excise tax of IRC Section 4972(a) apply to nondeductible contributions,

Internal Revenue Code:

IRC Section 4972(a) provides that in the case of any qualified employer plan, there is hereby imposed a tax equal to 10 percent of the nondeductible contributions under the plan (determined as of the close of the taxable year of the employer).

IRC Section 4972(c)(7) provides that in determining the amount of nondeductible contributions for any taxable year, an employer may elect for such year not to take into account any contributions to a defined benefit plan except, in the case of a multiemployer plan, to the extent that such contributions exceed the full-funding limitation (as defined in IRC Section 431(c)(6)). For purposes of this paragraph, the deductible limits under IRC Section 404(a)(7) shall first be applied to amounts contributed to defined contribution plans and then to amounts described in this paragraph. If an employer makes an election under this paragraph for a taxable year, paragraph (6) shall not apply to such employer for such taxable year.

Analysis:

While IRC Section 4972(c)(7) provides that an employer may make an election not to pay the tax under IRC Section 4972(a), there is no authority on the procedure for making this election.

This provision was added to the IRC by EGTRRA and amended by PPA ’06. Prior to PPA’06 the election only applied to amounts up to the full funding limit for both single and multiemployer plan. Because the full-funding limit no longer applies to single employer (including multiple employer) plans, PPA’06 removed this cap for these plans.

Conclusion:

Absent further guidance, if nondeductible contributions are found during an examination, the IRC Section 4972(c)(7) election should be deemed to have been made by the employer and the  excise tax under IRC Section 4972(a) should not be asserted, unless (1) the sponsor is making contributions to a multiemployer plan that exceed the full-funding limitation or (2) the sponsor is also making contributions to a defined contribution plan in the same year that exceed the IRC Section 404(a)(7) limits.

If the sponsor is making nondeductible contributions to a non-PBGC covered defined benefit plan (such as a professional service employer plan that has never had more than 25 active participants) and is contributing to a defined contribution plan, contact TEGEDC Area Counsel.

Page Last Reviewed or Updated: 19-May-2016