[Code of Federal Regulations]
[Title 26, Volume 5]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.404(a)-1]

[Page 429-431]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.404(a)-1  Contributions of an employer to an employees' trust or 
annuity plan and compensation under a deferred payment plan; general rule.

    (a)(1) Section 404(a) prescribes limitations upon deductions for 
amounts contributed by an employer under a pension, annuity, stock 
bonus, or profit-sharing plan, or under any plan of deferred 
compensation. It is immaterial whether the plan covers present employees 
only, or present and former employees, or only former employees. Section 
404(a) also governs the deductibility of unfunded pensions and death 
benefits paid directly to former employees or their beneficiaries (see 
Sec. 1.404(a)-12). For taxable years beginning after 1962, certain 
self-employed individuals may be covered by pension, annuity, or profit-
sharing plans. For the rules relating to the deduction of contributions 
on behalf of such individuals, see paragraph (a)(2) of Sec. 1.404(a)-8 
and Sec. 1.404(e)-1.

[[Page 430]]

    (2) Section 404(a) does not apply to a plan which does not defer the 
receipt of compensation. Furthermore, section 404(a) does not apply to 
deductions for contributions under a plan which is solely a dismissal 
wage or unemployment benefit plan, or a sickness, accident, 
hospitalization, medical expense, recreation, welfare, or similar 
benefit plan, or a combination thereof. For example, if under a plan an 
employer contributes 5 percent of each employee's compensation per month 
to a fund out of which employees who are laid off will be paid benefits 
for temporary periods, but employees who are not laid off have no rights 
to the funds, such a plan is an unemployment benefit plan, and the 
deductibility of the contributions to it is determined under section 
162. As to the deductibility of such contributions, see Sec. 1.162-9.
    (3) If, however, the contributions to a pension, profit-sharing, 
stock bonus, or other plan of deferred compensation can be used to 
provide any of the benefits referred to in subparagraph (2) of this 
paragraph, then, except as provided in section 404(c), section 404(a) 
applies to the entire contribution to the plan. Thus, if in the example 
described in subparagraph (2) of this paragraph, the employer's 
contribution on behalf of each employee is set up as a separate account, 
and if any amount which remains in an employee's account at the time of 
retirement is paid to him at such time, the deductibility of the 
contributions to the plan is determined under section 404(a). For the 
regulations for determining whether the benefits referred to in 
subparagraph (2) of this paragraph can be included in a qualified 
pension or profit-sharing plan, see Sec. 1.401-1(b).
    (4) As to inclusion of full-time life insurance salesmen within the 
class of persons considered to be employees, see section 7701(a)(20).
    (b) In order to be deductible under section 404(a), contributions 
must be expenses which would be deductible under section 162 (relating 
to trade or business expenses) or 212 (relating to expenses for 
production of income) if it were not for the provision in section 404(a) 
that they are deductible, if at all, only under section 404(a). 
Contributions may therefore be deducted under section 404(a) only to the 
extent that they are ordinary and necessary expenses during the taxable 
year in carrying on the trade or business or for the production of 
income and are compensation for personal services actually rendered. In 
no case is a deduction allowable under section 404(a) for the amount of 
any contribution for the benefit of an employee in excess of the amount 
which, together with other deductions allowed for compensation for such 
employee's services, constitutes a reasonable allowance for compensation 
for the services actually rendered. What constitutes a reasonable 
allowance depends upon the facts in the particular case. Among the 
elements to be considered in determining this are the personal services 
actually rendered in prior years as well as the current year and all 
compensation and contributions paid to or for such employee in prior 
years as well as in the current year. Thus, a contribution which is in 
the nature of additional compensation for services performed in prior 
years may be deductible, even if the total of such contributions and 
other compensation for the current year would be in excess of reasonable 
compensation for services performed in the current year, provided that 
such total plus all compensation and contributions paid to or for such 
employee in prior years represents a reasonable allowance for all 
services rendered by the employee by the end of the current year. A 
contribution under a plan which is primarily for the benefit of 
shareholders of the employer is not deductible. Such a contribution may 
constitute a dividend within the meaning of section 316. See also 
Sec. Sec. 1.162-6 and 1.162-8. In addition to the limitations referred 
to above, deductions under section 404(a) are also subject to further 
conditions and limitations particularly provided therein.
    (c) Deductions under section 404(a) are generally allowable only for 
the year in which the contribution or compensation is paid, regardless 
of the fact that the taxpayer may make his returns on the accrual method 
of accounting. Exceptions are made in the case of overpayments as 
provided in paragraphs (1), (3), and (7) of section 404(a), and, as 
provided by section

[[Page 431]]

404(a)(6), in the case of payments made by a taxpayer on the accrual 
method of accounting not later than the time prescribed by law for 
filing the return for the taxable year of accrual (including extensions 
thereof). This latter provision is intended to permit a taxpayer on the 
accrual method to deduct such accrued contribution or compensation in 
the year of accrual, provided payment is actually made not later than 
the time prescribed by law for filing the return for the taxable year of 
accrual (including extensions thereof), but this provision is not 
applicable unless, during the taxable year on account of which the 
contribution is made, the taxpayer incurs a liability to make the 
contribution, the amount of which is accruable under section 461 for 
such taxable year. See section 461 and the regulations thereunder. There 
is another exception in the case of certain taxpayers who are required 
to make additional contributions as a result of the Act of June 15, 1955 
(Public Law 74, 84th Cong., 69 Stat. 134), and the regulations 
thereunder.

[T.D. 6500, 25 FR 11682, Nov. 26, 1960, as amended by T.D. 6676, 28 FR 
10144, Sept. 17, 1963]