[Code of Federal Regulations]
[Title 26, Volume 5]
[Revised as of April 1, 2002]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.404(a)-4]

[Page 388-389]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
DEFERRED COMPENSATION, ETC.--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 (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

[[Page 389]]

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]