Tax Reform Incentive To Accelerate Defined Benefit Pension Plan Contributions

Tax Reform Incentive To Accelerate Defined Benefit Pension Plan Contributions

Defined-benefit pension plan sponsors may be motivated by the new tax reform law to make increased contributions to their plans by the applicable contribution due date. As a result of the new tax reform, corporate tax rates for tax year 2018 are lowering from 35% to 21% therefore the deductible value of contributions will decrease as the tax rate falls. Companies with underfunded pension plans can now deduct contributions made to those plans up until September 15, 2018 on their 2017 calendar year end tax return. The tax-decrease impact may motivate companies to take advantage of the extended defined-benefit plan contribution deduction due date to increase the contribution amount to take advantage of the higher 35% rate.

The main incentive to contribute before the September deadline is that a contribution to the defined-benefit pension plan at the higher tax rate of 35% is more beneficial to companies than that same contribution made at the new lower tax rate of 21%. Therefore, for a corporation with an underfunded defined benefit plan making the additional contribution by the September due date will generate a net tax savings since underfunded plans are expected to eventually require additional contributions.

With the new tax reform now in place corporations should take advantage of this opportunity to improve the financial status of their defined-benefit pension plan. Acting sooner rather than later on this will enable applicable companies to stabilize their plans and receive better tax deductibility for their contributions to the plans. Again, the deadline for a calendar year end 2017 contribution deduction to the plan is September 15, 2018.

Please contact your Herbein + Company, Inc. tax consultant if you have questions or need assistance.