3735 / What is the maximum amount that an employer may deduct annually for contributions on behalf of employees to a qualified defined benefit pension plan?

The maximum annual limit on deductions by an employer, including a self-employed person, for contributions to a defined benefit pension plan is determined by an actuary who follows regulations that are structured to provide level funding over an employee’s tenure with the employer. An overview of the rules that an actuary follows appears below.

(1)  The employer may deduct the amount needed to fund each employee’s past and current service credits distributed as a level amount or level percentage of compensation over the remaining period of his or her anticipated future service. If more than one-half of the remaining unfunded cost is attributable to three or fewer participants, the deduction of such 412(c) unfunded cost for them must be spread over at least five years.¹

(2)  The employer may deduct the plan’s normal cost for the year, plus an amount necessary to amortize the past service credits equally over 10 years.² The “normal cost” is the level annual amount that would be required to fund the employee’s pension from his or her date of employment to his or her retirement date.³ The amortizable base is limited to the unfunded costs attributable to past service liability.

(3)  In plan years beginning in 2006 or 2007, the employer could deduct a maximum of 150 percent of the plan’s unfunded current liability for the plan year ( Q 3742).⁴ In the case of a plan that has 100 or fewer participants, unfunded current liability does not include liability attributable to benefit increases for highly compensated employees ( Q 3930) resulting from a plan amendment that is made or that becomes effective, whichever is later, within the last two years.⁵