Category Archives: Deduction Limits 404

Changes to Deduction Limits under Code section 404

More Information About Treasury Decision on Combined Plan Deduction Limits

Earlier this week, I posted about an announcement by the American Society of Pension Professionals & Actuaries (ASPPA) that Treasury officials have informed Congress that they will enforce the new PPA combined plan deduction limits under Internal Revenue Code section 404(a)(7) in accordance with the language in the proposed PPA technical correction legislation (H.R. 3361 / S.1974). Q&A 9 of Notice 2007-28 will not be enforced and, in a defined benefit/defined contribution plan combination situation, if the D.C. contribution was not greater than 6%, Code section 404(a)(7) does not apply to the defined benefit plan. (hat tip to BenefitsLink.com).

Today brings an actual copy of the letter that Eric Solomon, the Assistant Secretary for Tax Policy with the U.S. Treasury Dept., sent to the Senate Finance Committee. Within that letter, the Treasury Dept. states that the “Treasury Department and the Internal Revenue Service will administer sections 801 and 803 of the Pension Protection Act of 2006 consistent with the language in sections 9(a) and (b) of S. 1974 and H.R. 3361, as introduced on August 3, 2007, in anticipation of the enactment of this legislation”. (hat tip to the American Benefits Council)

Mr. Solomon’s letter was sent in response to a 2-page letter sent to the Treasury Dept. by the ranking members of the Senate Finance Committee and the House Ways and Means Committee on September 11, 2007, asking the Treasury Dept. to address this issue.

This is another signal that the Pension Protection Technical Corrections Act of 2007 will become law before this year is over. The Joint Committee on Taxation released a 25-page Description on this bill on August 3, 2007.

[tags]Pension Protection Act, ppa, pension, retirement, Notice 2007-28, 404(a)(7), combined plan deduction limit, defined benefit, defined contribution, ERISA, pension protection technical corrections act[/tags]

Constitution Day and Combined Plan Deduction Limits


ASPPA announced on Friday that Treasury officials informed Congress yesterday that they will enforce the new PPA combined plan deduction limits under Internal Revenue Code section 404(a)(7) in accordance with the language in the proposed PPA technical correction legislation (H.R. 3361/S.1974). Q&A 9 of Notice 2007-28 will not be enforced and, in a defined benefit/defined contribution plan combination situation, if the D.C. contribution was not greater than 6%, Code section 404(a)(7) does not apply to the defined benefit plan. (hat tip to BenefitsLink.com).

For combined plans, this is very important news and more information should be coming from the IRS shortly because ASPPA is reporting two important and immediate effects of this change:

1. Employers who contributed in excess of 25% of compensation to their defined benefit plan (and in excess of Unfunded Current Liability) in 2006 based on an interpretation in conflict with Q&A 9 of Notice 2007-28 need not pay an excise tax; and

2. Employers who move fast for 2006 (who were previously limited by Notice 2007-28) have until Sept. 15th to increase their 2006 deductible contribution.

ASPPA is reporting the Sept. 15th date. They are normally very good about dates but YMMV (Your Mileage May Vary) on this one.

Before ASPPA made this announcement, I had planned on a great Constitution Day with the kids. 220 years ago, on Sept. 17, 1787, the U.S. Constitution was signed and gave us the current system of balance between the 3 branches of government.

ASPPA’s announcement about combined plan deduction limits is the perfect example of how ERISA is very much a constitutional animal. When Congress (the legislative branch) passed PPA last year, it modified the 25% combined defined benefit/defined contribution limit with the intent that employers who sponsor both a defined benefit and a defined contribution plan covering the same participants could make a contribution of up to 6% of the participants’ compensation to the defined contribution plan in addition to the contribution necessary to fund their defined benefit plan. This could allow the total contribution to exceed the previous 25% combined plan deduction limit. I’ve greatly simplified this modification by PPA in order to provide a very general meaning of how important this change was to the combined plan deduction limit.

The IRS (the executive branch) then releases Notice 2007-28, containing Q&A 9, which interpreted this modification to the combined plan deduction limit as being something less than the what Congress seemed to say in the Pension Protection Act. After lobbying by some very knowledgeable organizations, the IRS has seemed to change their interpretation to something more in line with Congress’ modification.

Of course, any participant who does not agree with either interpretation can go to federal court (the judicial branch).

[tags]Pension Protection Act, ppa, pension, retirement, constitution day, Notice 2007-28, 404(a)(7), combined plan deduction limit, defined benefit, defined contribution, ERISA[/tags]

American Academy of Actuaries Comments on Notice 2007-28

The American Academy of Actuaries released a four-page comment on Notice 2007-28 which they sent to the IRS. It contains a very simple example of how the interpretation of the combined deduction interpretation in Q&A9 will impact a plan. The example walks through what happens to the deduction limit for a sponsoring employer with a defined benefit plan when they implement a defined contribution plan with a one percent contribution. They are requesting the IRS to review the interpretation, or at least to provide relief to sponsoring employers who interpreted the deduction limit for 2006 differently than stated in Notice 2007-28. [tags]Pension Protection Act, Notice 2007-28, deduction, defined benefit, defined contribution, ppa[/tags]

Deduction Limits – IRS Issues Guidance about 404

The IRS issued Notice 2007-28 today, which provides guidance on the changes to Code section 404 made by the Pension Protection Act. Notice 2007-28 is only 4 pages long. The changes to Code section 404 made by PPA have two different effective dates – the first effective date is for years beginning after December 31, 2005. This guidance is for the changes which become effective after December 31, 2005. The IRS states in Notice 2007-28 that additional guidance will be issued for the changes which take effect in 2008. Notice 2007-28 provides guidance to the change in 404(a)(1), which modified the deduction permitted for defined benefit plans; and the change in 404(a)(7) which modified the combined limit on deductions for contributions to defined benefit plans and defined contribution plans with overlapping coverage.

The IRS also released a revised 2006 Priority Guidance List today. The new list has a better format than previous lists. I am posting a copy containing links to items on the list which have been published so far this year at Qualified Pension Consulting. [tags]Pension Protection Act, Notice 2007-28, defined benefit, deduction, ppa[/tags]