[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)-4]

[Page 438-439]
 
                       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)-4  Pension and annuity plans; limitations under section 404(a)(1)(A).

    (a) Subject to the applicable general conditions and limitations 
(see Sec. 1.404(a)-3), the initial limitation under section 
404(a)(1)(A) is 5 percent of the compensation otherwise paid or accrued 
during the taxable year to all employees under the pension or annuity 
plan. This initial 5-percent limitation applies to the first taxable 
year for which a deduction is allowed for contributions to or under such 
a plan and also applies to any subsequent year (other than one described 
in paragraph

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(d) of this section) for which the 5-percent figure is not reduced as 
provided in this section. For years to which the initial 5-percent 
limitation applies, no adjustment on account of prior experience is 
required. If the contributions do not exceed the initial 5-percent 
limitation in the first taxable year to which this limitation applies, 
the taxpayer need not submit actuarial data for such year.
    (b) For the first taxable year following the first year to which the 
initial 5-percent limitation applies, and for every fifth year 
thereafter, or more frequently where preferable to the taxpayer, the 
taxpayer shall submit with his return an actuarial certification of the 
amount reasonably necessary to provide the remaining unfunded cost of 
past and current service credits of all employees under the plan with a 
statement explaining all the methods, factors, and assumptions used in 
determining such amount. This amount may be determined as the sum of (1) 
the unfunded past service cost as of the beginning of the year, and (2) 
the normal cost for the year. Such costs shall be determined by methods, 
factors, and assumptions appropriate as a basis of limitations under 
section 404(a)(1)(C). Whenever requested by the district director, a 
similar certification and statement shall be submitted for the year or 
years specified in such request. The district director will make 
periodical examinations of such data at not less than 5-year intervals. 
Based upon such examinations the Commissioner will reduce the limitation 
under section 404(a)(1)(A) below the 5-percent limitation for the years 
with respect to which he finds that the 5-percent limitation exceeds the 
amount reasonably necessary to provide the remaining unfunded cost of 
past and current service credits of all employees under the plan. Where 
the limitation is so reduced, the reduced limitation shall apply until 
the Commissioner finds that a subsequent actuarial valuation shows a 
change to be necessary. Such subsequent valuation may be made by the 
taxpayer at any time and submitted to the district director with a 
request for a change in the limitation. See, however, paragraph (d) of 
this section with respect to taxable years to which the limitation under 
section 404(a)(1)(A) does not apply.
    (c) For the purpose of limitations under section 404(a)(1)(A), 
``compensation otherwise paid or accrued'' means all of the compensation 
paid or accrued except that for which a deduction is allowable under a 
plan that qualifies under section 401(a), including a plan that 
qualifies under section 404(a)(2). Where two or more pension or annuity 
plans cover the same employee, under section 404(a)(1)(A) the deductions 
with respect to each such plan are subject to the limitations applicable 
to the particular plan and the total deductions for all such plans are 
also subject to the limitations which would be applicable thereto if 
they constituted a single plan. Where, because of the particular 
provisions applicable to a large class of employees under a plan, the 
costs with respect to such employees are nominal in comparison with 
their compensation, after the first year to which the initial 5-percent 
limitation applies, deductions under section 404(a)(1)(A) are subject to 
limitations determined by considering the plan applicable to such class 
as if it were a separate plan. Deductions are allowable to the extent of 
the applicable limitations under section 404(a)(1)(A) even where these 
are greater than the applicable limitations under section 404(a)(1)(B) 
or section 404(a)(1)(C).
    (d) The limitation under section 404(a)(1)(A) shall not be used for 
purposes of determining the amount deductible for a taxable year of the 
employer which ends with or within a taxable year of the pension trust 
during which it is not exempt under section 501(a), or, in the case of 
an annuity plan, during which it does not meet the requirements of 
section 404(a)(2), or which ends after the trust or plan has terminated. 
See Sec. 1.404(a)-7 for rules relating to the limitation which is 
applicable for purposes of determining the amount deductible for such a 
taxable year of the employer.

[T.D. 6500, 25 FR 11685, Nov. 26, 1960, as amended by T.D. 6534, 26 FR 
515, Jan. 20, 1961]

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