Provided by John Lalonde
Pension Expert and Educational Board Member
for The Wealth Preservation Institute
Provisions of IRC Section 404(a)(6)
IRC section 404(a)(6) states:
"Time when contributions deemed made. For purposes of paragraphs (1), (2) and (3), a taxpayer shall be deemed to have made a payment on the last day of the preceding taxable year if the payment is on account of such taxable year and is made not later than the time prescribed by law for filing the return for such taxable year (including extensions thereof)."
The paragraphs in the above clause represent the following types of plans:
a. Pension trusts
b. Stock bonus and profit-sharing plans
Note: Defined Contribution Plans are addressed in subparagraph (3) - (IRC 404(a)(3)).
The Service determined in Revenue Ruling 76-28 that in order for contribution payments made after the close of the tax year to be deductible on the prior year’s return, the plan must treat the payments as made for the prior tax year and the employer must either:
· Designate in writing to the plan administrator or trustee that the payment is applicable to the prior tax year, or
· Deduct the payment on the prior year’s tax return.
In the context of this ruling the word “treat” is synonymous with allocate. Thus, a plan must allocate the contribution as if it were received during the prior tax year. This decision is consistent with TR 1.415-6(b)(7)(ii) which provides that an employer contribution can be treated as an annual addition for a prior plan year if the contribution was paid to the trust no later than 30 days after the IRC 404(a)(6) period expires.
Accordingly, if an employer pays the contribution by the due date for filing his annual tax return and the plan allocates the contribution during the prior tax year and the employer deducts the contribution on the prior year’s tax return, the contribution is deductible.
Theoretically, an employer may determine the amount of any discretionary contributions up to the last day of the IRC 404(a)(6) period. There is no IRS requirement that an employer adopt an amendment or Board of Directors resolution prior to the end of the tax year to establish a liability.
This does not mean that the Employer must allocate a contribution made within the IRC 404(a)(6) period to a prior year nor does it mean that it must deduct a contribution allocated to a prior year on a prior years tax return.
The next two examples should clarify this concept.
Example 1 - Tax Year Later Than Plan Year
__The Plan Year End is 9-30-10
__The Tax Year is 12-31-09.
__The Employer’s Form 1120 is on extension to 10-15-10.
__On 11-1-10 the employer made a $150,000 contribution and allocated the entire contribution to the PYE 9-30-10 (the employer relied on T.R 1.415-6(b)(7)(ii) to make the allocation).
The contribution can’t be deducted on the FYE 12-31-09 return since it was paid after the due date for filing the return. It must be deducted on the FYE 12-31-10 return.
Example 2 - Tax Year Later Than Plan Year
The facts are the same as the example above except that the contribution was made on or before 9-15-10.
The employer now has an option regarding on which return (FYE 12-31-09 or FYE 12-31-10) to claim the $150,000 deduction.
The employer has a choice because the contribution was contributed within the 404(a)(6) period and was allocated to the 9-30-10 year under T.R 1.415-6(b)(7)(ii). Therefore, it may be deducted on the FYE 12-31-09 return. However, since it was paid during the FYE 12-31-10 the Employer may alternatively choose to deduct the contribution on that return. Of course, whether the amount is actually deductible on any particular year’s return is contingent on the deductible limits under section 404(a)(3).