[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)-5]

[Page 440-441]
 
                       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)-5  Pension and annuity plans; limitations under section 404(a)(1)(B).

    (a) Subject to the applicable general conditions and limitations 
(see Sec. 1.404(a)-3), under section 404(a)(1)(B), deductions may be 
allowed to the extent of limitations based on costs determined by 
distributing the remaining unfunded cost of the past and current service 
credits with respect to all employees covered under the trust or plan as 
a level amount or level percentage of compensation over the remaining 
service of each such employee except that, as to any three individuals 
with respect to whom more than 50 percent of such remaining unfunded 
cost attributable to such individuals shall be distributed evenly over a 
period of at least five taxable years. See, however, paragraph (e) of 
this section with respect to taxable years to which the limitation under 
section 404(a)(1)(B) does not apply.
    (b) The statutory limitation for any taxable year under section 
404(a)(1)(B) is any excess of the amount of the costs described in 
paragraph (a) of this section for the year over the amount allowable as 
a deduction under section 404(a)(1)(A).
    (c) For this purpose, such excess, adjusted for prior experience, 
may be computed for each year as follows, all determinations being made 
as of the beginning of the year:
    (1) Determine the value of all benefits expected to be paid, after 
the beginning of the year for all employees, any former employees, and 
any other beneficiaries, then covered under the plan.
    (2) If employees contribute under the plan, determine the value of 
all contributions expected to be made after the beginning of the year by 
employees then covered under the plan.
    (3) Determine the value of all funds of the plan as of the beginning 
of the year.
    (4) Determine the amount remaining to be distributed as a level 
amount or as a level percentage of compensation over the remaining 
future service of each employee by subtracting from subparagraph (1) of 
this paragraph the sum of subparagraphs (2) and (3) of this paragraph.
    (5) Determine the value of all compensation expected to be paid 
after the beginning of the year to all employees then covered under the 
plan.
    (6) Determine an accrual rate for each employee by dividing 
subparagraph (5) of this paragraph into subparagraph (4) of this 
paragraph.
    (7) Compute the excess under section 404(a)(1)(B) for the year by 
multiplying the compensation paid to all employees covered under the 
plan during the year by any excess of subparagraph (6) of this paragraph 
over 5 percent. In general, where this method is used, the limitation 
under section 404(a)(1)(B) will be equal to the excess so computed 
without further adjustment on account of prior favorable experience, 
provided all the factors and assumptions used are reasonable in view of 
all applicable considerations (see Sec. 1.404(a)-3) and provided 
subparagraph (5) of this paragraph is not less than five times the 
annual rate of compensation in effect at the beginning of the year.
    (d) Instead of determining the excess deductible under section 
404(a)(1)(B) by the method shown in paragraph (c), such excess may be 
based upon cost determined by some other method which is reasonable and 
appropriate under the circumstances. Thus, such excess may be based on 
the amounts necessary with respect to each individual covered employee 
to provide the remaining unfunded cost of all his benefits under the 
plan distributed as a level amount over the period remaining until the 
normal commencement of his retirement benefits, in accordance with other 
generally accepted actuarial methods which are reasonable and 
appropriate in view of the provisions of the plan, the funding medium, 
and other applicable considerations.
    (e) The limitation under section 404(a)(1)(B) 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

[[Page 441]]

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 11686, Nov. 26, 1960, as amended by T.D. 6534, 26 FR 
515, Jan. 20, 1961]