Accelerating deductions for defined benefit pension contributions.

Sponsors of defined benefit pension plans may use a tax-saving technique to accelerate the deduction/or plan contributions. This technique involves the interplay between the timing rules for deductions with those applicable to contributions to meet the minimum funding requirements.

Sponsors of defined benefit pension plans are required to make quarterly contributions to meet their plan's minimum funding requirement (Sec. 412(m)). The contributions must be made by the fifteenth day of the fourth, seventh, tenth and thirteenth months after the beginning of the plan year. The required quarterly contribution/or 1992 and later years is 25% of the lesser of --90% of the current year's minimum funding requirement, or --100% of the preceding year's minimum funding requirement (but only ii the preceding year was 12 months long).

A plan sponsor that makes such quarterly contributions is not required, however, to deduct those contributions in the year they are made. The deduction rules in Sec. 404 are independent of the minimum funding rules in Sec. 412 (Regs. Sec. 11.412(c)-12(b)(2)and Rev. Rul. 77-82). Thus, under Sec. 404(a)(6), any quarterly contributions made before the extended due date of the sponsor's tax return for the preceding year may be deducted in the preceding tax year to the extent such amounts, plus all other contributions for the preceding year,

do not exceed the maximum deduction limit in Sec. 404(a)(1)(A)(iii).

Example: A defined benefit plan's minimum funding requirements for 1991 and 1992 are $1,000,000 and $1,100,000, respectively. Each quarterly contribution for 1992 must be $247,500 (i.e., the lesser of 90% of $1,100,000 divided by 4 or 100% of $1,000,000 divided by 41. The maximum deduction limit for 1991 is $1,500,000) the employer, E, made earlier contributions for 1991 of $1,000,000. Thus, assuming E's 1991 tax return due date is extended to Sept. 15, 1992, the first two 1992 quarterly contributions, totaling $495,000, may be deducted on E's 1991 tax return even though they are treated as 1992 contributions for minimum funding purposes.

Sponsors who make quarterly contributions to their defined benefit plan may fail to perform this analysis due to the plan's overfunded status. From Howard A. Freidin, Fellow of the Society of Actuaries, and Michael S. Kesner, CPA, Chicago, Ill.