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