3940 / What other specific rules affect an employer’s deduction for its contributions to a qualified plan?

If a plan is qualified, an employer may deduct its contributions currently, regardless of whether the rights of the individual participants are forfeitable or nonforfeitable.¹ To be deductible, a contribution on behalf of a participant must qualify as reasonable compensation for services actually rendered to the contributing employer by the participant as an employee.² The IRS has discussed the limitations on deductions and carryovers for contributions to a qualified profit sharing plan when an employee’s total compensation is unreasonable.³

Where reasonableness of compensation was not in question, the Tax Court ruled that a newly formed corporation could deduct its full contribution to a defined benefit plan for the plan year that began in the corporation’s short first tax year and it rejected the IRS argument that only 4.5/12 of the contribution should be deductible because the short year was only 4.5 months long.⁴

Deductions with respect to a multiemployer plan maintained pursuant to a collective bargaining agreement are determined as if all participants were employed by a single employer.⁵ In the case of a multiple employer plan, the deduction limit generally is applied as if each employer maintained a separate plan.⁶ Different rules apply to a plan adopted by two or more corporations that are members of the same controlled group ( Q 8964); in that case, the deduction limits are determined as if all such employers were a single employer.⁷

Deductions with respect to a CSEC (Cooperative and Small Employer Charity) plan are determined as if all participants were employed by a single employer.⁸

Certain employer liability to the Pension Benefit Guaranty Corporation (“PBGC”) as a result of plan termination or withdrawal from a multiemployer plan will be treated as a contribution to be deducted when paid without regard to the usual limits on the deduction of employer contributions to qualified plans.⁹

Contributions to fund post-retirement medical benefits under IRC Section 401(h) for common law employees may be deducted currently by an employer if they are reasonable, ascertainable, and distinct from contributions to fund retirement benefits, provided the benefits are subordinate to the retirement benefits provided by the plan ( Q 3830).¹⁰ Contributions to fund postretirement medical benefits are not taken into account in determining the amount deductible with respect to contributions for retirement benefits. The amount of any excess pension assets transferred in a “qualified transfer” ( Q 3836) to an IRC Section 401(h) account is not deductible.¹¹

Any allocable portion of past service and current pension costs that must be included in the basis of property produced by an employer or held for resale by the employer under the uniform capitalization rules is not deductible by the employer.¹²