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CCH® PENSION AND BENEFITS — 2/6/08

Deductible limit for plan contributions not affected by plan amendment made within two years.

A company that sponsored a defined benefit pension plan for its employees could not take into account a plan amendment which increased plan liability in calculating the limit on its deduction for plan contributions, where the amendment was made within the two plan years prior to the plan year used to determine the deductible limit, the IRS has privately ruled.

A plan’s deduction limit, under pre-2008 rules, is determined by reference to unfunded current liability under Code Sec. 412(l) , and the maximum amount deductible by the sponsor is not less than 150 percent of that liability. Note, that prior to enactment of the Pension Protection Act of 2006 (PPA; P.L. 109-280), the limit was not less than 100 percent of that liability.

In this case, the company amended the plan on December 13, 2002, to allow for benefit increases under the plan resulting from increases in the Code Sec. 415 limits. The plan covered less than 100 participants. The plan sought to have the plan amendment taken into consideration in order to calculate the deductible amount of the contribution due to the plan for the taxable year ending December 31, 2004. Code Sec. 404(a)(1)(D)(ii) , before and after the changes made by PPA, provides that for defined benefit plans with less than 100 participants, unfunded current liability does not include the liability attributable to benefit increases for highly compensated employees resulting from a plan amendment which is made or becomes effective, whichever is later, within the last 2 years. Even if Code Sec. 404(a)(1)(D)(ii) was considered to refer to plan years (rather than tax years), the amendment was made within the two plan years prior to the plan year used to determine the deductible limit. The company could not, therefore, consider the liability increases resulting from that amendment in determining its deductible limit.

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