Deductible contribution limit for two DC multiemployer plans takes into account only employees who had allocations other than elective deferrals

 

The limit on deductible contributions under Code Sec. 404(a)(3)(A) to two defined contribution multiemployer plans was to be applied by aggregating the compensation of the employees who were beneficiaries under both plans as if all such employees were employed by a single employer under Code Sec. 413(b), taking into account only those employees who had allocations other than elective deferrals, according to an IRS letter ruling.

An unincorporated, nonprofit association consisted of member companies, which were all separate entities. No member company was aggregated with the association or any other member company under Code Sec. 414(b), (c), (m), or (o) (controlled group, common control, affiliated service group, and leased employee rules, respectively). Benefits for employees of each of the member companies were specified under a collectively bargained agreement and included two defined contribution multiemployer plans. The two plans were separate plans with separate trusts. Nothing precluded participants in one plan from participating in the other plan. One of the plans allowed participants to make a cash or deferred election under Code Sec. 401(k). Not all of the participants in the two plans were eligible for employer contributions other than elective deferrals.

The IRS first concluded that the limits imposed by Code Sec. 415 on annual additions to a participant’s account in one multiemployer plan did not take into account the annual additions to the same individual’s account under another multiemployer plan, and vice versa. This conclusion was true regardless of whether the annual additions under both plans were attributable to contributions made by the same employer for the same limitation year. Under an exception provided in Code Sec. 415(f)(2)(B), any plan that is a multiemployer plan (as defined in Code Sec. 414(f)) is not combined or aggregated with any other multiemployer plan for purposes of applying the limits of Code Sec. 415.

A ruling was requested that contributions by each member company to each of the two plans would not be greater than the deduction limit imposed by Code Sec. 404(a)(3)(A) if the sum of the contributions to each plan made by all of the contributing companies did not exceed 25% of the compensation of employees who were eligible to make elective deferrals to either plan, determined by treating all of the employees as if they were employed by a single employer. The IRS ruled that the limit on deductible contributions under Code Sec. 404(a)(3)(A) was to be applied by aggregating the compensation of the employees who were beneficiaries under both plans as if all of these employees were employed by a single employer under Code Sec. 413(b), taking into account only those employees who had allocations other than elective deferrals. If the aggregate of all contributions, other than elective deferrals, made by all the member companies for the taxable year did not exceed the limit determined by treating the member companies as a single employer under Code Sec. 413(b), then the contributions made by each member company during the taxable year satisfied the deduction limit under Code Sec. 404(a)(3)(A) for the taxable year without regard to whether or not the contributions would have exceeded the deduction limit determined for each separate member company.

Code Sec. 413(b) prescribes rules for plans maintained pursuant to a collectively bargained agreement, notwithstanding any other provision of the Code. For these plans, Code Sec. 413(b)(7) provides that each applicable limitation in Code Sec. 404(a) will be determined as if all participants in a plan are employed by a single employer. In addition, Code Sec. 413(b)(7) states that contributions to or under the plan by each employer that is a party to the collectively bargained agreement will be considered not to exceed an applicable limitation under Code Sec. 404(a) if the anticipated contributions for a plan year are not greater than the limitation, determined on the basis prescribed by Code Sec. 413(b)(7).

Code Sec. 404(a)(3)(A)(i)(I) limits deductions for profit-sharing or stock bonus plans to 25% of compensation otherwise paid or accrued during a taxable year to all beneficiaries under the plan. In addition, Code Sec. 404(a)(3)(A)(iv) provides that when contributions are made to two or more stock bonus or profit-sharing trusts, the trusts will be considered a single trust for purposes of applying the limitation on deductible contributions for stock bonus and profit-sharing trusts under Code Sec. 404(a)(3)(A). However, Code Sec. 404(n) states that the amount of an elective deferral as defined in Code Sec. 402(g)(3) will not be subject to any limitation in Code Sec. 404(a)(3). Code Sec. 404(n) further states that such elective deferrals will not be taken into account in applying any such limitation to any other contributions. The IRS explained that the effect of Code Sec. 404(n) was to apply the limitations of Code Sec. 404 without regard to the existence or absence of elective deferrals. According to the IRS, the elective deferrals should be disregarded in determining which employees are beneficiaries under the plan for purpose of applying the limit on deductible contributions under Code Sec. 404(a)(3)(A)(i). An employee who is treated as benefitting under a Code Sec. 401(k) plan for a plan year, but who is not eligible for any employer contributions other than elective deferrals, would not be considered a beneficiary of the trust for purposes of Code Sec. 404(a)(3)(A)(i)(I) since Code Sec. 404(n) requires the limits on deductible contributions to be applied without regard to the existence or absence of elective deferrals.

Source: IRS Letter Ruling 201229012.

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For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer’s Benefits Reports.

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