Comments on revenue ruling 90-105: timing of deduction for section 401(k) contributions December 20, 1990.

Comments on Revenue Ruling 90-105: Timing of Deduction for Section 401(k) Contributions

On behalf of Tax Executives Institute, I am pleased to submit the following comments on Rev. Rul. 90-105, 1990-52 I.R.B. 1, which was issued by the Internal Revenue Service on December 7, 1990.

The Institute's Federal Tax Committee is in the process of analyzing the ruling -- which relates to the timing of deductions for amounts contributed under cash or deferred arrangements under section 401(k) -- and TEI may submit additional substantive comments at a later date. The purpose of this letter is not to focus on the substance of Rev. Rul. 90-105 -- the applicability of section 404(a)(6) to such contributions -- but rather to object to the ruling's effective date. Specifically, assuming Rev. Rul. 90-105 is not withdrawn in its entirety, TEI recommends that the ruling apply only with respect to taxable years beginning after December 7, 1990 -- the release date of Rev. Rul. 90-105.

Background

Rev. Rul. 90-105 holds that contributions to a qualified cash or deferred arrangement within the meaning of section 401(k) or to a defined contribution plan as matching contributions within the meaning of section 401(m) are not deductible by the employer for a taxable year if those contributions are attributable to compensation earned by plan participants after the end of that taxable year; this holding applies, moreover, without regard to whether section 404(a)(6) deems the contributions to have been paid on the last day of that taxable year and without regard to whether the employer uses the cash or accrual method of accounting.

On its face, the holding of Rev. Rul. 90-105 applies on a prospective basis: the requirement that taxpayers change their method of accounting for section 401(k) elective deferrals and section 401(m) matching contributions is effective for contributions that are deducted on returns filed on or after December 7, 1990, the release date of Rev. Rul. 90-105. The revenue ruling provides that the change in method is to be implemented on a "cut-off" basis, without any section 481(a) adjustment.

Prospective treatment under Rev. Rul. 90-105 is conditioned on taxpayers notifying the IRS that they are changing their method of accounting on their first return filed after December 7, 1990. If such a notice is not provided, then the IRS can require the taxpayers to change its method of accounting in the earliest open year on a cut-off basis, without any...