Since some of the PPA amendments to Section 404 are effective for plan years beginning after December 31, 2005 and others are effective for plan years beginning after December 31, 2007, the IRS first addresses which deductible limit applies for plans with a plan year that does not coincide with the employer’s tax year. According to the notice, the employer can choose to use the deductible limit for the plan year beginning in the taxable year, the deductible limit for the plan year ending in the taxable year, or a weighted average of the two. The IRS provides examples for each choice.
The notice explains that the PPA amended Section 404 of the Code for years beginning after December 31, 2005 to replace the limitation based on unfunded current liability with a limitation based on 150% of current liability (140% in the case of a multiemployer plan) and change the interest rate to use for purposes of determining current liability. The IRS explained that the deductible limit is determined as of the valuation date for the plan year and is adjusted for interest to the earlier of the end of the plan year or the end of the taxable year of the employer.
In addition, the notice clarifies new rules for treatment of recent benefit increases due to new plan amendments when calculating current liability for defined benefit plans. The notice also reminds employers that elective deferrals are not taken into account for purposes of determining the combined deductible limit for employers who offer multiple retirement plans to employees.
Application of the combined limit differs when employer contributions to a defined contribution plan exceed 6% of participant compensation. According to the notice, when employer contributions to defined contribution plans exceed 6% of compensation of participants, the amount of employer contributions to defined contribution plans to which the combined limit applies is equal to the amount of employer contributions for the plan year less 6% of participant compensation.
The IRS notice is here .