Section 431: Deducting Employer Contributions

Employers contributing to multiemployer pension plans operate under specific tax regulations that govern when they can deduct those payments. The timing of these deductions is not always aligned with the simple act of making a payment. Federal tax law provides a framework that allows businesses to make contributions after their fiscal year has concluded and still claim the deduction for that completed year. This provision gives employers a window to finalize their contribution amounts while still aligning the tax deduction with the year the liability was incurred.

Core Requirements for Deductibility

For an employer’s contribution to a multiemployer pension plan to be deductible for a preceding taxable year, several conditions must be met. The first is that the payment must be made to a qualified multiemployer pension plan. This means the plan must satisfy the requirements of the Internal Revenue Code, which govern its structure and operation for the benefit of employees and their beneficiaries.

A central condition is that the contribution must be treated by the plan as being made “on account of” the employer’s preceding taxable year. The IRS has clarified this standard in Revenue Ruling 76-28, stating a payment qualifies if the plan treats it in the same manner as it would have treated a payment received on the last day of that prior tax year. This ensures the plan’s funding calculations accurately reflect the contribution as satisfying obligations for that period.

To facilitate this treatment, the employer must designate the payment in writing to the plan administrator or trustee as a payment made on account of its preceding taxable year. This written designation serves as a formal instruction, preventing ambiguity about which year the contribution should be applied to, which is important for plans receiving payments from many employers.

Finally, the employer must claim the deduction on its federal income tax return for that specific preceding taxable year. This action completes the process, aligning the employer’s tax records with the plan’s accounting and the payment’s designation, thereby substantiating the deduction.

Contribution Deadlines for Deductibility

The ability to deduct a contribution for a prior year is governed by a strict deadline. For a payment to be deductible for a given tax year, it must be made by the due date for filing the employer’s federal income tax return for that year, including any extensions. This deadline is an important component of tax planning.

Consider an employer with a fiscal year that ends on June 30. If the employer secures a six-month extension to file its return, its new deadline becomes nine and a half months after its fiscal year-end. To deduct a contribution on its tax return for the year ending June 30, 2024, the employer must make the payment by its extended tax filing deadline.

This extended timeframe allows the employer sufficient time after its year-end to calculate its exact liability, finalize its financial statements, and arrange the cash flow to make the contribution. An employer can prepare its tax return for the year ending June 30, 2024, while still having several months to make the actual payment that will be deducted on that return.

The Plan Sponsor Election Process

For the contribution timing rules to function properly, the multiemployer plan must have an administrative process to accept and account for these post-year-end payments. The plan sponsor, typically a board of trustees, can make a formal election to specify the plan year to which contributions are attributed. This is a formal adoption of an accounting procedure, not an election filed on a unique IRS form.

This election is established by the plan sponsor through a clear statement of policy. The statement should contain the official name of the pension plan, the plan’s Employer Identification Number (EIN), and the plan year for which the election is first effective. It must also include a declaration that the plan is adopting the procedure to accept contributions made after the close of an employer’s taxable year and treat them as being made on account of that prior year.

The election is formally made when the plan sponsor approves the policy and attaches a copy of the election statement to the plan’s annual return, Form 5500, for the first plan year it is to be effective. This creates an official record with the Department of Labor and the IRS.

Once made, this accounting election remains in effect for all subsequent years unless it is formally revoked by the plan sponsor. A revocation would also need to be documented and attached to the Form 5500 for the year the change is effective. This provides consistency and predictability for participating employers.

Employer Tax Filing and Recordkeeping

After ensuring all requirements are met, the employer must properly claim the deduction on its federal income tax return. The specific form used depends on the business structure. A corporation will report this deduction on Form 1120, a partnership reports it on Form 1065, and a sole proprietor claims it on Schedule C of Form 1040.

To withstand potential IRS scrutiny, the employer must maintain records to substantiate the deduction. This documentation is the primary evidence that all conditions for the special timing rule have been satisfied. The documents an employer must retain include proof of payment, such as a canceled check or bank statement, and a copy of the written designation provided to the plan administrator. An employer should also retain a copy of the plan’s formal election statement that confirms its practice of accepting such contributions.