26 U.S.C. § 4972: Tax on nondeductible contributions to qualified employer plans

Cases: Citrus Valley Estates v. Commissioner, 99 T.C. 379 (1992); Pizza Pro Equip. Leasing, Inc. v. Commissioner, 147 T.C. No. 14 (2016); Thousand Oaks Residential Care Home I, Inc. v. Commissioner, T.C. Memo. 2013-10

Final rules 1

(a) Tax imposed In the case of any qualified employer plan, there is hereby imposed a tax equal to 10 percent of the nondeductible contributions under the plan (determined as of the close of the taxable year of the employer).

(b) Employer liable for tax The tax imposed by this section shall be paid by the employer making the contributions.

Amended 1988

1988 Pub. L. 100-647 Pub. L. 100–647, § 1011A(e)(1), amended subsec. (c) generally, revising and restating as pars. (1) to (4) provisions of former pars. (1) and (2).

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(1) In general The term “nondeductible contributions” means, with respect to any qualified employer plan, the sum of—

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(A) the excess (if any) of—

(i) the amount contributed for the taxable year by the employer to or under such plan, over

(ii) the amount allowable as a deduction under section 404 for such contributions (determined without regard to subsection (e) thereof), and

(B) the amount determined under this subsection for the preceding taxable year reduced by the sum of—

(i) the portion of the amount so determined returned to the employer during the taxable year, and

(ii) the portion of the amount so determined deductible under section 404 for the taxable year (determined without regard to subsection (e) thereof).

(2) Ordering rule for section 404 For purposes of paragraph (1), the amount allowable as a deduction under section 404 for any taxable year shall be treated as—

(A) first from carryforwards to such taxable year from preceding taxable years (in order of time), and

(B) then from contributions made during such taxable year.

(3) Contributions which may be returned to employer In determining the amount of nondeductible contributions for any taxable year, there shall not be taken into account any contribution for such taxable year which is distributed to the employer in a distribution described in section 4980(c)(2)(B)(ii) if such distribution is made on or before the last day on which a contribution may be made for such taxable year under section 404(a)(6).

(4) Special rule for self-employed individuals For purposes of paragraph (1), if—

Amended 1988

1988 Pub. L. 100-647 Pub. L. 100–647, § 2005(a)(1), added par. (4) and redesignated former par. (4) as (5).

(A) the amount which is required to be contributed to a plan under section 412 on behalf of an individual who is an employee (within the meaning of section 401(c)(1)), exceeds

(B) the earned income (within the meaning of section 404(a)(8)) of such individual derived from the trade or business with respect to which such plan is established,

such excess shall be treated as an amount allowable as a deduction under section 404.

(5) Pre-1987 contributions The term “nondeductible contribution” shall not include any contribution made for a taxable year beginning before January 1, 1987.

Amended 1988

1988 Pub. L. 100-647 Pub. L. 100–647, § 2005(a)(1), added par. (4) and redesignated former par. (4) as (5).

(6) Exceptions In determining the amount of nondeductible contributions for any taxable year, there shall not be taken into account—

Amended 1994, 2001, 2004

2004 Pub. L. 108-311 Pub. L. 108–311, § 408(b)(9), amended directory language of Pub. L. 107–16, § 652(b)(3). See 2001 Amendment note below.
2001 Pub. L. 107-16 Pub. L. 107–16, § 652(b)(4), substituted “Subparagraph (B)” for “Subparagraph (C)” in concluding provisions.
2001 Pub. L. 107-16 Pub. L. 107–16, § 652(b)(3), as amended by Pub. L. 108–311, § 408(b)(9), substituted “subparagraph (A)” for “subparagraph (B)” in two places in concluding provisions.
2001 Pub. L. 107-16 Pub. L. 107–16, § 652(b)(2), in concluding provisions, struck out first sentence which read as follows: “If 1 or more defined benefit plans were taken into account in determining the amount allowable as a deduction under section 404 for contributions to any defined contribution plan, subparagraph (B) shall apply only if such defined benefit plans are described in section 404(a)(1)(D).”
2001 Pub. L. 107-16 Pub. L. 107–16, § 637(b), in concluding provisions, inserted at end “Subparagraph (C) shall not apply to contributions made on behalf of the employer or a member of the employer’s family (as defined in section 447(e)(1)).”
2001 Pub. L. 107-16 Pub. L. 107–16, § 652(b)(1), redesignated subpar. (C) as (B).
2001 Pub. L. 107-16 Pub. L. 107–16, § 637(a), added subpar. (C).
1994 Pub. L. 103-465 Pub. L. 103–465 added par. (6).

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(A) so much of the contributions to 1 or more defined contribution plans which are not deductible when contributed solely because of section 404(a)(7) as does not exceed the amount of contributions described in section 401(m)(4)(A), or

Amended 2001, 2004, 2006

2006 Pub. L. 109-280 Pub. L. 109–280, § 803(c), amended subpar. (A) generally. Prior to amendment, subpar. (A) read as follows: “so much of the contributions to 1 or more defined contribution plans which are not deductible when contributed solely because of section 404(a)(7) as does not exceed the greater of—
“(i) the amount of contributions not in excess of 6 percent of compensation (within the meaning of section 404(a) and as adjusted under section 404(a)(12)) paid or accrued (during the taxable year for which the contributions were made) to beneficiaries under the plans, or
“(ii) the amount of contributions described in section 401(m)(4)(A), or”.
2004 Pub. L. 108-311 Pub. L. 108–311, § 404(c), amended cl. (ii) generally. Prior to amendment, cl. (ii) read as follows: “the sum of—
“(I) the amount of contributions described in section 401(m)(4)(A), plus
“(II) the amount of contributions described in section 402(g)(3)(A), or”.
2001 Pub. L. 107-16 Pub. L. 107–16, § 652(b)(1), redesignated subpar. (B) as (A) and struck out former subpar. (A) which read as follows: “contributions that would be deductible under section 404(a)(1)(D) if the plan had more than 100 participants if—
“(i) the plan is covered under section 4021 of the Employee Retirement Income Security Act of 1974, and
“(ii) the plan is terminated under section 4041(b) of such Act on or before the last day of the taxable year,”.
2001 Pub. L. 107-16 Pub. L. 107–16, § 637(a), struck out “and” at end.

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(B) so much of the contributions to a simple retirement account (within the meaning of section 408(p)), a simple plan (within the meaning of section 401(k)(11)), or a simplified employee pension (within the meaning of section 408(k)) which are not deductible when contributed solely because such contributions are not made in connection with a trade or business of the employer.

Amended 1997, 2001, 2022

2022 Pub. L. 117-328 Pub. L. 117–328 substituted “408(p)),” for “408(p)) or” and inserted “, or a simplified employee pension (within the meaning of section 408(k))” after “401(k)(11))”.
2001 Pub. L. 107-16 Pub. L. 107–16, § 652(b)(1), redesignated subpar. (C) as (B). Former subpar. (B) redesignated (A).
2001 Pub. L. 107-16 Pub. L. 107–16, § 637(a), substituted “, or” for period at end.
2001 Pub. L. 107-16 Pub. L. 107–16, § 616(b)(2)(B), substituted “(within the meaning of section 404(a) and as adjusted under section 404(a)(12))” for “(within the meaning of section 404(a))”.
1997 Pub. L. 105-34 Pub. L. 105–34 amended subpar. (B) generally. Prior to amendment, subpar. (B) read as follows: “contributions to 1 or more defined contribution plans which are not deductible when contributed solely because of section 404(a)(7), but only to the extent such contributions do not exceed 6 percent of compensation (within the meaning of section 404(a)) paid or accrued (during the taxable year for which the contributions were made) to beneficiaries under the plans.”

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For purposes of subparagraph (A), the deductible limits under section 404(a)(7) shall first be applied to amounts contributed to a defined benefit plan and then to amounts described in subparagraph (A). Subparagraph (B) shall not apply to contributions made on behalf of the employer or a member of the employer’s family (as defined in section 447(e)(1)). [OLRC note: See References in Text note below.]

(7) Defined benefit plan exception In determining the amount of nondeductible contributions for any taxable year, an employer may elect for such year not to take into account any contributions to a defined benefit plan except, in the case of a multiemployer plan, to the extent that such contributions exceed the full-funding limitation (as defined in section 431(c)(6)). For purposes of this paragraph, the deductible limits under section 404(a)(7) shall first be applied to amounts contributed to defined contribution plans and then to amounts described in this paragraph. If an employer makes an election under this paragraph for a taxable year, paragraph (6) shall not apply to such employer for such taxable year.

Amended 2001, 2006

2006 Pub. L. 109-280 Pub. L. 109–280, § 114(e)(5), substituted “except, in the case of a multiemployer plan, to the extent that such contributions exceed the full-funding limitation (as defined in section 431(c)(6))” for “except to the extent that such contributions exceed the full-funding limitation (as defined in section 412(c)(7), determined without regard to subparagraph (A)(i)(I) thereof)”.
2001 Pub. L. 107-16 Pub. L. 107–16, § 653(a), added par. (7).

(d) Definitions For purposes of this section—

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(1) Qualified employer plan

Amended 1988

1988 Pub. L. 100-647 Pub. L. 100–647, § 1011A(e)(2), amended par. (1) generally. Prior to amendment, par. (1) read as follows: “The term ‘qualified employer plan’ means—
“(A) any plan meeting the requirements of section 401(a) which includes a trust exempt from the tax under section 501(a),
“(B) an annuity plan described in section 403(a), and
“(C) any simplified employee pension (within the meaning of section 408(k)).”

(A) In general The term “qualified employer plan” means—

(i) any plan meeting the requirements of section 401(a) which includes a trust exempt from tax under section 501(a),

(ii) an annuity plan described in section 403(a),

(iii) any simplified employee pension (within the meaning of section 408(k)), and

(iv) any simple retirement account (within the meaning of section 408(p)).

Amended 1996

1996 Pub. L. 104-188 Pub. L. 104–188 added cl. (iv).

(B) Exemption for governmental and tax exempt plans The term “qualified employer plan” does not include a plan described in subparagraph (A) or (B) of section 4980(c)(1).

(2) Employer In the case of a plan which provides contributions or benefits for employees some or all of whom are self-employed individuals within the meaning of section 401(c)(1), the term “employer” means the person treated as the employer under section 401(c)(4).