Here is a great planning opportunity which allows plan sponsors to maximize benefits and deductions. Company A would adopt two retirement plans; 1) a defined benefit plan, and 2) a money purchase plan. Eligible employees would participate in both plans.

Since there are common participants in these plans, the sponsor’s maximum deductible contribution would normally be limited by the 25% of compensation limit under Internal Revenue Code §404. However, by taking advantage of the rules governing the timing of deductible contributions versus minimum funding contributions, plan sponsors are able to deduct in excess of this 25% of compensation limit. This method is commonly known as the "flip-flop" method. Please note that in order to use this method, the plan sponsor may not file for an extension on the corporate tax return.

Under the flip-flop method, the Company would deduct contributions totaling 25% of compensation for the first year. Since the total required contributions for the two plans exceed 25% of compensation, the excess is a carry forward to the next year. Each year, the Company would alternate the deductions from one plan to the other, making deductible contributions to the defined benefit plan in odd numbered years and the money purchase plan in even numbered years.

Let’s assume that we implement these plans in 2000 for a calendar year corporation. The maximum deductible contribution for 2000 is limited to 25% of compensation and must be deposited no later than March 15, 2001 (the corporate tax return due date). The remaining minimum contribution is a carry forward contribution, attributable to the defined benefit plan. This carry forward must be deposited between March 16, 2001 and September 15, 2001.

For 2001, Company A would deduct only those contributions attributable to the defined benefit plan plus the carry forward minimum contribution from 2000. The contribution must be deposited by March 15, 2002. The remaining minimum contribution is a carry forward contribution and must be deposited between March 16, 2002 and September 15, 2002.

For 2002, Company A would deduct only those contributions attributable to the money purchase plan plus the carry forward minimum contribution from 2001. The contribution must be deposited by March 15, 2003. The remaining minimum contribution is a carry forward contribution and must be deposited between March 16, 2003 and September 15, 2003.

This pattern would continue in subsequent years. The Company would deduct the current year’s contribution plus the prior year’s carry forward minimum contribution. Note that, in any given year, the carry forward contribution and the minimum required contribution that are being deducted must always be attributable to the same plan.

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