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IRS ruling jeopardizes separate deduction for retirement plan expenses.

Employer payments of ongoing expenses incurred with respect to a tax-qualified retirement plan may be deducted separately as ordinary and necessary business expenses, rather than as plan contributions subject to Sec. 404 limitations (Regs. Sec. 1.404(a)-3(d)). The revocation of a portion of a 1989 private letter ruling, however, may mean that the separate Sec. 162 deduction will be allowed only if the payment is made by the employer directly to the service provider. If the payment is made to the plan trustee as reimbursement for trustee payments to the service provider, the payment may be treated as a plan contribution. For employers already at the deduction limit, such trustee reimbursements could be nondeductible contributions subject to a 10% penalty.

IRS Letter Ruling 8941010, a portion of which was revoked by IRS Letter Ruling 9124034, concluded that employer payments of investment manager fees were separately deductible, regardless of whether the payments were made directly to the service provider or to the trust as reimbursement of trustee paid expenses.

The 1989 ruling cited Rev. Rul. 86-142, which, in the case of an individual retirement account (IRA), allowed a deduction under Sec. 162 only for separately billed trustee fees paid directly by the individual who maintained the IRA.

Letter Ruling 9124034 states merely that a portion of the earlier ruling "is not in accord with the proper interpretation of the Code." The revocation is limited to the allowance of a Sec. 162 deduction for reimbursements paid to a trustee.

The IRS's conclusion that investment manager fees paid directly by an employer are deductible under Sec. 162 but the same type of fees reimbursed to a trust are deductible only under Sec. 404 may be a surprise to some taxpayers. Employers with plan contributions at or near the deduction limit may want to ensure that the separate deduction is preserved by making payments directly to the service providers. From Eric A. Raps, Esq., Washington, D.C.
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Author:Raps, Eric A.
Publication:The Tax Adviser
Article Type:Brief Article
Date:Jul 1, 1992
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