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10 Oddball Tax Deductions

11 Most Overlooked Tax Deductions

Updated for 2011

Qualified Plans

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Defined Benefit Plans

Defined benefit plans promise a specific benefit to each participant at retirement, for example, $3,000 a month.

Funding Requirement for Defined Benefit Plans

Actuarial Computation:

Because a defined benefit plan promises to pay a specific benefit to each plan participant upon retirement, the plan must be adequately funded to insure the money is actually there when the time comes.

The question is:

How does the employer know how much money to pay into the plan each year so that the money is actually there to provide the promised benefits when the time comes?

This is where the services of an actuary are needed.

An actuary performs a computation designed to determine the annual funding requirement for the plan.

This is a complex calculation (a projection), performed annually, involving a variety of variables and assumptions, for example, estimated earnings on plan assets, rate of inflation, time line for participants, and amount of benefit promised.

Minimum funding requirements:

If your plan is subject to the minimum funding requirements, you, as the employer, must make quarterly installment payments of the required contributions.

If you don't pay the full installments timely, you may have to pay interest on any underpayment for the period of the underpayment.

Due dates for installments payments of required contributions:

The due dates for the installments are 15 days after the end of each quarter.

For a calendar-year plan, the installments are:

April 15
July 15
October 15
January 15 (of the following year).

Each quarterly installment must be 25% of the required annual payment.

Extended period for making contributions:

Additional contributions required to satisfy the minimum funding requirement for a plan year will be considered timely if made by 8 1/2 month after the end of that year.

Annual Benefit Limit Under a Defined Benefit Plan

For defined benefit plans, rather than a contribution limit, the limit is placed on the benefit amount that may be provided under the plan.

For tax year 2011, the annual benefit for a participant under a defined benefit plan cannot exceed the smaller of the following amounts:

100% of the participant's average compensation for his or her highest 3 consecutive calendar years.
$195,000

The annual contribution amount that is required to provide the future benefit is computed by an actuary each year.

After the actuarial computation is complete and contribution amount is known for the particular year, the employer then funds that amount.

This is an annual process designed to insure that the funds are actually there when the time comes for each plan participant to receive his/her pension benefit.

There is no The deduction for contributions to a defined benefit plan is based on actuarial assumptions and computations.

Consequently, an actuary must figure out your deduction limit.

In figuring the deduction for contributions, you cannot take into account any contributions or benefits that are more than the specified limits.

However, your deduction for contributions to a defined benefit plan can be as much as the plan's unfunded current liability.

Qualified Plans: 401(k) Plans; SIMPLE 401(k) Plans; Matching Contributions; Nonelective Contributions

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