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Internal Revenue Code, § 4972. Tax On Nondeductible Contributions To Qualified Employer Plans

I.R.C. § 4972(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).
I.R.C. § 4972(b) Employer Liable For Tax
The tax imposed by this section shall be paid by the employer making the contributions.
I.R.C. § 4972(c) Nondeductible Contributions
For purposes of this section—
I.R.C. § 4972(c)(1) In General
The term “nondeductible contributions” means, with respect to any qualified employer plan, the sum of—
I.R.C. § 4972(c)(1)(A)
the excess (if any) of—
I.R.C. § 4972(c)(1)(A)(i)
the amount contributed for the taxable year by the employer to or under such plan, over
I.R.C. § 4972(c)(1)(A)(ii)
the amount allowable as a deduction under section 404 for such contributions (determined without regard to subsection (e) thereof), and
I.R.C. § 4972(c)(1)(B)
the amount determined under this subsection for the preceding taxable year reduced by the sum of—
I.R.C. § 4972(c)(1)(B)(i)
the portion of the amount so determined returned to the employer during the taxable year, and
I.R.C. § 4972(c)(1)(B)(ii)
the portion of the amount so determined deductible under section 404 for the taxable year (determined without regard to subsection (e) thereof).
I.R.C. § 4972(c)(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—
I.R.C. § 4972(c)(2)(A)
first from carryforwards to such taxable year from preceding taxable years (in order of time), and
I.R.C. § 4972(c)(2)(B)
then from contributions made during such taxable year.
I.R.C. § 4972(c)(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).
I.R.C. § 4972(c)(4) Special Rule For Self-Employed Individuals
For purposes of paragraph (1), if—
I.R.C. § 4972(c)(4)(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
I.R.C. § 4972(c)(4)(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.
I.R.C. § 4972(c)(5) Pre-1987 Contributions
The term “nondeductible contribution” shall not include any contribution made for a taxable year beginning before January 1, 1987.
I.R.C. § 4972(c)(6) Exceptions
In determining the amount of nondeductible contributions for any taxable year, there shall not be taken into account—
I.R.C. § 4972(c)(6)(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
I.R.C. § 4972(c)(6)(B)
so much of the contributions to a simple retirement account (within the meaning of section 408(p)) or a simple plan (within the meaning of section 401(k)(11)) which are not deductible when contributed solely because such contributions are not made in connection with a trade or business of the employer.
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)).
I.R.C. § 4972(c)(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.
I.R.C. § 4972(d) Definitions
For purposes of this section—
I.R.C. § 4972(d)(1) Qualified Employer Plan
I.R.C. § 4972(d)(1)(A) In General
The term “qualified employer plan” means—
I.R.C. § 4972(d)(1)(A)(i)
any plan meeting the requirements of section 401(a) which includes a trust exempt from tax under section 501(a),
I.R.C. § 4972(d)(1)(A)(ii)
an annuity plan described in section 403(a),
I.R.C. § 4972(d)(1)(A)(iii)
any simplified employee pension (within the meaning of section 408(k)), and
I.R.C. § 4972(d)(1)(A)(iv)
any simple retirement account (within the meaning of section 408(p)).
I.R.C. § 4972(d)(1)(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).
I.R.C. § 4972(d)(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).
(Added Pub. L. 99-514, title XI, 1131(c)(1), Oct. 22, 1986, 100 Stat. 2477, and amended Pub. L. 100-647, title I, 1011A(e)(1), (2), title II, 2005(a)(1), Nov. 10, 1988, 102 Stat. 3477, 3610; Dec. 8, 1994, Pub. L. 103-465, title VII, Sec. 755; Aug. 20, 1996, Pub. L. 104-188, 1421, 110 Stat. 1755; June 7, 2001, Pub. L. 107-16, title VI, Sec. 616, 637, 652, 653, 115 Stat. 38; Pub. L. 108-311, title IV, Sec. 404(c), Oct. 4, 2004, 118 Stat. 1166; Pub. L. 109-280, title I, VIII, Sec. 114(e)(5), 803(c), Aug. 17, 2006.)
BACKGROUND NOTES
AMENDMENTS
2006 - Subsec. (c)(6)(A). Pub. L. 109-280, Sec. 803(c), amended subpar. (A). Before amendment, it read as follows:
“(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 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” .
Subsec. (c)(7). Pub. L. 109-280, Sec. 114(e)(5), amended par. (7) by substituting “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)”.
2004-Subsec. (c)(6)(A)(ii). Pub. L. 108-311, Sec. 404(c), amended clause (ii). Before amendment it read as follows:
“(ii) 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-Subsec. (c)(6)(B)(i). Pub. L. 107-16, Sec. 616(b)(2)(B), amended clause (i) by substituting “(within the meaning of section 404(a) and as adjusted under section 404(a)(12))” for “(within the meaning of section 404(a))”.
Subsec. (c)(6). Pub. L. 107-16, Sec. 637(b), amended par. (6) by adding the sentence at the end.
Subsec. (c)(6)(A)-(C). Pub. L. 107-16, Sec. 637(a), amended par. (6) by striking “and” at the end of subpar. (A), by substituting “, or” for the period at the end of subpar. (B), and adding subpar. (C).
Subsec. (c)(6)(A)-(C). Pub. L. 107-16, Sec. 652(b)(1), struck subpar. (A) and redesignated subpar. (B) and (C) as subpar. (A) and (B), respectively. Before being struck it read as follows:
“(A) 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,”.
Subsec. (c)(6). Pub. L. 107-16, Sec. 652(b), amended par. (6) by striking the first sentence following subpar (B), as redesignated; by substituting “subparagraph (A)” for “subparagraph (B)” in the next to last sentence; and by substituting “Subparagraph (B)” for “Subparagraph (C)” in the last sentence. Before being struck, the first sentence 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).”
Subsec. (c)(7). Pub. L. 107-16, Sec. 653(a), added par. (7).
1997--Subsec. (c)(6)(B). Pub. L. 105-34, Sec. 1507(a) amended subpar. (B). Prior to amendment it read as follows:
“(B) 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.”
1996--Subsec. (d)(1). Pub. L. 104-188, 1421(b)(9)(D), struck “and” at the end of clause (ii); substitute “, and” for “.” at the end of clause (iii); and added clause (iv).
1994 -- Subsec. (c)(6). Pub. L. 103-465, Sec. 755, added paragraph (6), effective as follows:
(1) Section 4972(c)(6)(A) shall apply to taxable years ending on or after the date of enactment of this Act.
(2) Section 4972(c)(6)(B) shall apply to taxable years ending on or after December 31, 1992.
1988--Subsec. (c). 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).
Subsec. (c)(4), (5). Pub. L. 100-647, 2005(a)(1), added par. (4) and redesignated former par. (4) as (5).
Subsec. (d)(1). 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)).”
EFFECTIVE DATE OF 2006 AMENDMENT
Sec. 114(g)(2) of Pub. L. 109-280, added by Pub. L. 110-458, Sec. 101(d)(3), provides that:
“(2) EXCISE TAX.—The amendments made by subsection (e) shall apply to taxable years beginning after 2007, but only with respect to plan years described in paragraph (1) which end with or within any such taxable year.”
Amendment by Sec. 803(c) of Pub. L. 109-280 effective for contributions for taxable years beginning after December 31, 2005.
EFFECTIVE DATE OF 2004 AMENDMENT
Amendment by Sec. 404(c) of Pub. L. 108-311 applicable as if included in the provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001 [Pub. L. 107-16, Sec. 614] to which it relates [effective: years beginning after 2001].
EFFECTIVE DATE OF 2001 AMENDMENTS
Amendment by Sec. 616(b)(2)(B) of Pub. L. 107-16 applicable to years beginning after December 31, 2001.
Amendments by Sec. 637(a) of Pub. L. 107-16 applicable to taxable years beginning after December 31, 2001. Sec. 637(c) of Pub. L. 107-16 provided that:
“(c) No Inference.--Nothing in the amendments made by this section shall be construed to infer the proper treatment of nondeductible contributions under the laws in effect before such amendments.”
Amendments by Sec. 652(b) of Pub. L. 107-16 applicable to plan years beginning after December 31, 2001.
Amendment by Sec. 653(a) of Pub. L. 107-16 applicable to years beginning after December 31, 2001.
Section 901 (Sunset of Provisions of Act) of Pub. L. 107-16, as amended by Pub. L. 107-358, provided that:
“(a) IN GENERAL.--All provisions of, and amendments made by, this Act shall not apply--
“(1) to taxable, plan, or limitation years beginning after December 31, 2010, or
“(2) in the case of title V, to estates of decedents dying, gifts made, or generation skipping transfers, after December 31, 2010.
“(b) APPLICATION OF CERTAIN LAWS.--The Internal Revenue Code of 1986 and the Employee Retirement Income Security Act of 1974 shall be applied and administered to years, estates, gifts, and transfers described in subsection (a) as if the provisions and amendments described in subsection (a) had never been enacted.
“(c) EXCEPTION.-Subsection (a) shall not apply to section 803 (relating to no federal income tax on restitution received by victims of the Nazi regime or their heirs or estates).”
PENSIONS AND INDIVIDUAL RETIREMENT ARRANGEMENT PROVISIONS OF ECONOMIC GROWTH AND TAX RELIEF RECONCILIATION ACT OF 2001 MADE PERMANENT
Section 811 of Pub. L. 109-280 provided that:
“Title IX of the Economic Growth and Tax Relief Reconciliation Act of 2001 shall not apply to the provisions of, and amendments made by, subtitles A through F of title VI of such Act (relating to pension and individual retirement arrangement provisions).”
EFFECTIVE DATE OF 1997 AMENDMENTS
Amendment by Sec. 1507(a) of Pub. L. 105-34 applicable to taxable years beginning after December 31, 1997.
EFFECTIVE DATE OF 1996 AMENDMENT
Amendment by section 1421(b)(9) of Pub. L. 104-188 effective for taxable years beginning after December 31, 1996.
EFFECTIVE DATE OF 1988 AMENDMENT
Amendment by section 1011A(e)(1), (2) of Pub. L. 100-647 effective, except as otherwise provided, as if included in the provision of the Tax Reform Act of 1986, Pub. L. 99-514, to which such amendment relates, see section 1019(a) of Pub. L. 100-647, set out as a note under section 1 of this title.
Amendment by section 2005(a)(1) of Pub. L. 100-647 effective as if included in the amendments made by the provisions of the Omnibus Budget Reconciliation Act of 1987, Pub. L. 100-203, to which it relates, see section 2005(e) of Pub. L. 100-647, set out as a note under section 404 of this title.
EFFECTIVE DATE
Section applicable to taxable years beginning after Dec. 31, 1986, with special rules in case of plans maintained pursuant to collective bargaining agreements, see section 1131(d) of Pub. L. 99-514, as amended, set out as an Effective Date of 1986 Amendment note under section 404 of this title.
INCREASE IN AMOUNT FOR PLAN TERMINATION INSURANCE UNDER EMPLOYEE RETIREMENT INSURANCE SECURITY ACT OF 1974
Section 1011A(e)(5) of Pub. L. 100-647 provided that: “In the case of any taxable year beginning in 1987, the amount under section 4972(c)(1)(A)(ii) of the 1986 Code for a plan to which title IV of the Employee Retirement Income Security Act of 1974 [29 U.S.C. 1301 et seq.] applies shall be increased by the amount (if any) by which, as of the close of the plan year with or within which such taxable year begins--
“(A) the liabilities of such plan (determined as if the plan had terminated as of such time), exceed
“(B) the assets of such plan.”
PLAN AMENDMENTS NOT REQUIRED UNTIL JANUARY 1, 1989
For provisions directing that if any amendments made by section 1131(c)(1) of Pub. L. 99-514 require an amendment to any plan, such plan amendment shall not be required to be made before the first plan year beginning on or after Jan. 1, 1989, see section 1140 of Pub. L. 99-514, set out as a note under section 401 of this title.
PRIOR PROVISIONS
A prior section, added Pub. L. 93-406, title II, 2001(f)(1), Sept. 2, 1974, 88 Stat. 955, and amended Pub. L. 94-455, title XIX, 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1834; Pub. L. 97-34, title III, 312(e)(3), Aug. 13, 1981, 95 Stat. 285; Pub. L. 97-448, title I, 103(c)(10)(B), Jan. 12, 1983, 96 Stat. 2377; Pub. L. 98-369, div. A, title IV, 491(d)(40), July 18, 1984, 98 Stat. 851, which related to tax on excess contributions for self-employed individuals, was repealed, applicable to years beginning after Dec. 31, 1983, by Pub. L. 97-248, title II, 237(c)(1), Sept. 3, 1982, 96 Stat. 511; Pub. L. 105-34, title XVI, Sec. 1507(a), Aug. 5, 1997, 111 Stat 788; Pub. L. 108-311, title IV, Sec. 404(c), Oct. 2004; Pub. L. 109-280, title I, VIII, Sec. 114, Sec. 803(c), 120 Stat. 780.)