3939 / When may an employer take a deduction for contributions made to a pension, profit sharing, or stock bonus plan?

An employer’s contribution generally is deductible only in the taxable year it is paid, except for certain carry-forwards ( Q 3735).¹ Both cash and accrual basis employers, including self-employed individuals, are deemed to have made a contribution in the preceding tax year if the payment is on account of that year and is made no later than the due date, including extensions, of the employer’s tax return.²

In contrast, minimum funding rules may require that a contribution be made earlier than the time at which it is deductible ( Q 3742).

A payment will be considered made on account of the preceding tax year if the plan treats it as if received on the last day of that year and either the employer designates, in writing, that the payment is made on account of the previous year or the employer claims it as a deduction on its tax return for the preceding tax year. This kind of designation is irrevocable.³ See Q 3724 for requirements of quarterly estimated contribution payments applicable to certain plans.

A delayed payment is deductible for the prior year only if the payment would have been deductible had it actually been made on the last day of the prior taxable year.⁴ Thus, where an employer’s taxable year ended June 30 and the plan year ended December 31, the employer could not deduct elective deferrals and matching contributions attributable to compensation earned by plan participants after June 30 because the contributions were not compensation for services rendered in the prior taxable year of the employer ( Q 3940).⁵

Where an employer’s taxable year ended January 31, 1998, and the plan year was the calendar year, the employer could deduct elective deferrals and matching contributions attributable to compensation earned by plan participants during January 1998 on its return for its fiscal year ending January 31, 1998, even though that was the first month of the 1998 plan year.⁶

Regulations under IRC Section 401(k) provide that contributions made in anticipation of future performance of services generally will not be treated as elective contributions; thus, no deduction is available for these amounts. The regulations essentially make it clear that contributions made pursuant to a cash or deferred election must be made after the employee’s performance of services with respect to which the compensation is payable ( Q 3753).⁷

The liability to make a contribution need not have accrued in the preceding year, but the plan must have been in existence before the end of the preceding tax year.⁸ Likewise, the trust must be in existence within the taxable year for which deductions for contributions are claimed ( Q 3838).⁹ If a plan trust is complete in all respects on the last day of the taxable year except that it has no corpus, the trust is deemed to have been in existence in the taxable year if the initial contribution is made within the grace period.¹⁰

In the case of a nontrusteed annuity plan evidenced only by a contract with an insurance company, the plan is not in effect until the contract is executed and issued. Where the plan is separate from the insurance contract, the plan will be considered in effect by the close of the taxable year if:

(1)  the contract has been applied for and the application accepted by the insurance company;

(2)  a contract or abstract has been prepared outlining the terms of the plan;

(3)  a part payment of premium has been made; and

(4)  the plan has been communicated to the employees.¹¹

If the plan year of a defined benefit plan and the employer’s tax year are not the same, the employer may claim a deduction for a contribution made for the plan year that either ends or begins in the tax year or may use a weighted average such as the number of months in each plan year falling in the tax year. The same method must be used consistently.¹²

Where a short taxable year with no plan year beginning or ending within it resulted when an employer changed its taxable year to a calendar year, the IRS approved a method giving the employer a prorated deduction for the length of the short year.¹³