May 19, 2019

May 17, 2019

Subscribe to Latest Legal News and Analysis

Hidden Opportunity: Deducting 2018 Pension Contributions Against 2017 Income

At the end of 2017, many businesses scrambled to find expenses before year-end that could be deducted on their 2017 federal income tax return against the higher income tax rates in effect for last year. For most expenses, the deadline to act passed on New Year’s Eve 2017. However, businesses that sponsor a tax-qualified defined benefit pension plan may have the opportunity to generate deductions on their 2017 return by making contributions to the plan during 2018.

In order to do so, the contributions will need to satisfy the general deductibility requirements for expenses, the specific deductibility requirements for pension contributions, and the minimum funding rules. This combination of requirements and rules is difficult to navigate, but in general, a deduction should be available to the extent the contribution (1) is made no later than September 15, 2018, (2) is otherwise deductible under the income tax provisions of Chapter 1 of the Code, (3) is designated as a contribution for the 2017 plan year on Schedule SB of the plan’s 2017 Form 5500, and (4) does not cause the plan to be more than 150-percent funded, measured in a very specific way provided under the Code.

The analysis and deadlines above apply to single-employer plans subject to the minimum funding requirements of Code section 430 that have a calendar plan year and are maintained by employers that have a calendar taxable year. The analysis and relevant deadlines will differ in the case of multiemployer plans, plans not subject to the minimum funding requirements of Code section 430, plans with non-calendar plan years, and plans sponsored by employers with non-calendar tax years. An analogous deduction may be available with respect to contributions to defined contribution plans, but the opportunity is likely to be more limited.

© 2019 Covington & Burling LLP


About this Author

Richard Shea, employee benefits attorney, Covington

Richard Shea is chair of Covington’s Employee Benefits and Executive Compensation practice. Mr. Shea is widely regarded as the nation’s leading authority on cash balance, pension equity, and other complex benefit plan designs. His practice spans the full breadth of activities needed to help his clients resolve novel, sensitive, or intractable issues. His approach focuses on developing important new legal insights and ideas, and then combining them into effective litigation, legislative, regulatory, and benefit design strategies for his clients. The representative matters...

Erika Skougard, Corporate litigation lawyer, Covington

Erika Skougard is an associate in the Washington, DC office, where she practices in the areas of employee benefits, executive compensation, and employment law.

Representative Matters

  • Representing Fortune 500 employer in connection with retaliation claim brought by a former employee under the False Claims Act.
  • Assisting companies with internal review and audit of administration practices for tax-qualified employee benefits plans.
  • Assisting employer sponsors of tax-qualified retirement plans in developing plan governance documents.
  • Advising clients regarding compliance with ERISA’s prohibited transaction rules and 408(b) disclosure requirements.