Employers May Not Deduct 401(k) Contributions for Work Done After Year-end

[5] This conclusion is supported by recent decisions of the Tax Court and the Ninth Circuit in Lucky Stores, Inc. v. Commissioner, 107 T.C. 1 (1996), aff'd, 98-2 U.S.T.C. Para. 50,662 (9th Cir. August 20, 1998) and Airborne Freight Corporation v. United States, 96-1 U.S.T.C. Para. 50,004 (W.D. Wash. 1995), rev'd, 98-2 U.S.T.C. Para. 50,664 (9th Cir. August 20, 1998), in which the courts held that the "plain meaning" of IRC section 404(a)(6) precludes an employer from deducting, for its current taxable year, payments made to collectively bargained multiemployer plans (so-called "Taft Hartley" plans) that were attributable to compensation earned by plan participants after the end of that taxable year. The courts noted that "the procedures that employers and administrators use to determine contribution amounts" (e.g., determined by the hours or weeks of employee service rendered during the immediately preceding month) clearly indicate that such contributions are not made "on account of" the employer's current taxable year as required by IRC section 404(a)(6). Although Lucky Stores and Airborne Freight involved collectively-bargained multiemployer defined benefit plans, the reasoning of these cases is equally applicable to IRC section 401(k) plan contributions because, in both collectively-bargained multiemployer defined benefit plans and IRC section 401(k) plans, the contributions made by an employer relate to specific work performed by the employee for a particular period of time (e.g., month). ² These situations are distinguishable from situations involving contributions made to single employer defined benefit plans because contributions to such plans are not related to specific work performed for a particular period of time but, rather, they are based, in general, on an actuarial calculation of the minimum amount that must be paid for the valuation year in order to fund the benefits under the plan in accordance with an acceptable actuarial cost method, as required by IRC section 412, and the maximum amount that may be paid and deducted by the employer under IRC section 404.

[6] Please contact Amy L. Speetjens at 622-3435 if you have any questions regarding this matter.

² Even if the IRC section 401(k) plan and employer tax years involved in a particular case arguably satisfy the test set forth in Revenue Ruling 76-28, 1976-1 C.B. 107 (i.e., that the payment is treated by the plan in the same manner that the plan would treat a payment actually received on the last day of such preceding taxable year of the employer), we believe that the plain "on account of" language of IRC section 404(a)(6), as cited by the courts in Lucky Stores and Airborne Freight, controls the disposition of these cases.