Rev. Rul. 83-48
1983-1 C.B. 93.
Internal Revenue Service
Revenue Ruling
DEDUCTIONS; CONTRIBUTIONS; CREDITS AND CARRYOVERS
Published: March 21, 1983
26 CFR 1.404(a)-9: Contributions of an employer to an employee's profit-sharing or stock bonus trust that meets the requirements of section 401(a); application of section 404(a)(3)(A)
Deductions; contributions; credits and carryovers. The position stated in Rev. Rul. 70-185 with respect to the credit and contribution carryover provisions in section 404(a)(3)(A) of the Code for payments by an employer to an exempt stock bonus or profit-sharing trust are restated in view of the enactment of ERISA. Rev. Rul. 70-185 superseded.
The purpose of this revenue ruling is to restate the position in Rev. Rul. 70-185, 1970-1 C.B. 109, in view of the enactment of the Employee Retirement Income Security Act of 1974, Pub.L. 93-406, 1974-3 C.B. 1.
Rev. Rul. 70-185 illustrates both the credit and contribution carryover provisions in section 404(a)(3)(A) of the Internal Revenue Code for payments by an employer to an exempt stock bonus or profit-sharing trust.
Section 404(a)(3)(A) of the Code states that contributions to an exempt employees' trust are deductible:
... In the taxable year when paid, if the contributions are paid into a stock bonus or profit-sharing trust, and if such taxable year ends within or with a taxable year of the trust with respect to which the trust is exempt under section 501(a), in an amount not in excess of 15 percent of the compensation otherwise paid or accrued during the taxable year to all employees under the stock bonus or profit-sharing plan. If in any taxable year there is paid into the trust, or a similar trust then in effect, amounts less than the amounts deductible under the preceding sentence, the excess, or if no amount is paid, the amounts deductible, shall be carried forward and be deductible when paid in the succeeding taxable years in order of time, but the amount so deductible under this sentence in any such succeeding taxable year shall not exceed 15 percent of the compensation otherwise paid or accrued during such succeeding taxable year to the beneficiaries under the plan, but the amount so deductible under this sentence in any one succeeding taxable year together with the amount so deductible under the first sentence of this subparagraph shall not exceed 25 percent of the compensation otherwise paid or accrued during such taxable year to the beneficiaries under the plan. In addition, any amount paid into the trust in any taxable year in excess of the amount allowable with respect to such year under the preceding provisions of this subparagraph shall be deductible in the succeeding taxable years in order of time, but the amount so deductible under this sentence in any one such succeeding taxable year together with the amount allowable under the first sentence of this subparagraph shall not exceed 15 percent of the compensation otherwise paid or accrued during such taxable year to the beneficiaries under the plan ...
The carryover provisions contained in section 404(a)(3)(A) of the Code, relating to contributions of an employer to a profit-sharing or stock bonus trust, are of two types, namely, credit carryovers (provided by the second sentence of that section) and contribution carryovers (contained in the third sentence). A credit carryover may arise in a taxable year in which the amount contributed is less than the limitation under the first sentence of section 404(a)(3)(A) of the Code (i.e., 15 percent of the compensation, not including that for which a deduction is allowable under a plan that qualifies under section 401(a)). A contribution carryover may arise in a taxable year in which the amount contributed is more than the limitation under the first or second sentence of section 404(a)(3)(A) of the Code.
Under a plan contribution formula that calls for a contribution based only on a percentage of the employer's annual profits, the contribution may be based on that percentage regardless of the amount that would be deductible in a particular year. If the contribution is less than the 15 percent limitation, a credit carryover will result, but if the contribution is more than the limitation, there will be a contribution carryover. If a formula calls for a contribution equal to the lesser of a fixed percentage of the annual profits or 15 percent of the compensation of participants, exclusive of the contribution under the plan, credit carryovers may arise, but there will be no occasion for deductions under the carryover provisions as long as the contributions continue, in accordance with the formula, to be limited to the amounts deductible under the first sentence of section 404(a)(3)(A) of the Code. The application of the credit and contribution carryovers under each of the above- mentioned contribution formulas is illustrated in the examples set forth below.
Example 1: A plan, which for all years in question is a qualified plan within the meaning of section 401(a) of the Code, requires a contribution of ten percent of the employer's annual profits. If the annual profits and compensation result in the contributions shown in the following table, the deductions will be as shown, and the carryovers will arise and be absorbed as indicated:
-------------------------------------------------------------------------
Year Compensation 10 15 percent of Contribution Deduction
percent compensation
of
annual
profit
-------------------------------------------------------------------------
1976 $1000 $100 $150 $100 $100
1977 400 125 60 125 100
1978 500 50 75 50 75
1979 600 100 90 100 100
-------------------------------------------------------------------------
Total - 375 375 375 375
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Credit Contribution
carryover carryover at
at end of end of year
year
---------------------------
50 0
10 25
10 0
0 0
---------------------------
- -
It should be observed that over a period of years the total contributed in accordance with the formula contained in the plan was deductible. In 1976, although 15 percent of compensation amounted to $150,000, only $100,000 was contributed because that was the amount permitted under the formula. Accordingly, there was a credit carryover of $50,000. In 1977, a contribution of $125,000 was made in accordance with the formula, but only $100,000 was deductible. This consisted of the $60,000 deductible under the first sentence of section 404(a)(3)(A) of the Code plus $40,000 of the credit carryover from 1976. The remaining $10,000 of credit carryover from 1976 could not be absorbed in 1977 because of the 25 percent of compensation limit contained in the second sentence of section 404(a)(3)(A). Also, because only $100,000 of the $125,000 contributed in 1977 was deductible, there was a contribution carryover of $25,000. In 1978, a contribution of $50,000 was made, but 15 percent of compensation amounted to $75,000, and since the total of the contribution carryover and the amount deductible under the first sentence of section 404(a)(3)(A) of the Code cannot exceed 15 percent of compensation (notice that none of the credit carryover may be used to absorb any of the contribution carryover), the amount deductible for that year was $75,000. Therefore, all of the 1977 contribution carryover of $25,000 was absorbed in 1978, and the amount of the deduction was limited to $75,000.
In 1979, the $100,000 contribution was $10,000 more than the primary limitation and all of the $10,000 credit carryover was absorbed.
Example 2: Assume the same facts except that the plan formula requires a contribution of the lesser of ten percent of the annual profits or 15 percent of compensation of participants. If the annual profits and compensation result in the contributions as shown, the deductions will be as indicated:
-------------------------------------------------------------------------
Year Compensation 10 15 percent of Contribution Deduction
percent compensation
of
annual
profit
-------------------------------------------------------------------------
1976 $1000 $100 $150 $100 $100
1977 400 125 60 60 60
1978 500 50 75 50 50
1979 600 100 90 90 90
-------------------------------------------------------------------------
Total - 375 375 300 300
---------------------------
Credit Contribution
carryover carryover at
at end of end of year
year
---------------------------
$50 --------------
50 --------------
75 --------------
75 --------------
---------------------------
75 --------------
Since the entire contribution for each year was deductible under the first sentence of section 404(a)(3)(A) of the Code, there was no occasion for deductions under the carryover provisions. However, if the formula had required a contribution equal to the lesser of ten percent of profits or the maximum amount deductible for the year under section 404(a)(3)(A) of the Code, including the second and third sentence thereof, the contribution for 1977 would have been $100,000 since $40,000 of the credit carryover from the first year would have been used to raise the deduction up to the limit of 25 percent of compensation in 1977.
A definite contribution formula is not required as a condition for qualification of a profit-sharing plan, but the principles set forth above are equally applicable to a plan without a definite contribution formula.
This revenue ruling does not consider whether the requirements of section 415 of the Code are satisfied.
Rev. Rul. 70-185 is superseded because the position stated therein is restated under current law in this revenue ruling.
Rev. Rul. 83-48, 1983-1 C.B. 93.