New York Advisory Opinion TSB-A-81(9)I: How does a shareholder of a professional service corporation compute the section 612(b)(7) add-back to New York adjusted gross income when the corporation's retirement plan is a defined benefit plan, rather than a defined contribution plan?

Plain-English summary

Shinazo Irie, a shareholder in a professional service corporation, asked how to compute the addition to federal adjusted gross income required under Tax Law section 612(b)(7) where the corporation made a deductible contribution, on the shareholder's behalf, to a defined benefit retirement plan.

Section 612(b)(7), as it applied before 1982, required a professional service corporation shareholder to add back the difference between (1) the corporation's federal deduction for contributions made on the shareholder's behalf to a qualified plan, and (2) the maximum amount the shareholder could have deducted for the same purpose had he been self-employed. Before ERISA, that self-employed cap was a flat dollar/percentage limit under IRC section 404(e) (the lesser of $2,500 or 10% of earned income, later raised by ERISA to $7,500 or 15%). But ERISA also let self-employed individuals adopt defined benefit plans for the first time, and for those plans it substituted a different limit under IRC section 401(j) - not a flat contribution cap, but a maximum annual accrued BENEFIT, computed using actuarial assumptions about the participant's age, compensation, and plan experience. Because that benefit-based limit can translate into a higher or lower deductible contribution than the flat $7,500/15% figure depending on the actuarial assumptions used, there's no simple dollar substitute.

The Department resolved this by directing the shareholder to construct a hypothetical parallel plan: a defined benefit plan that (1) began at the same time as his actual participation in the corporate plan, (2) used the same reasonable actuarial assumptions and plan experience as the corporate plan, (3) provided for the lesser of the corporate plan's actual benefit accrual or the maximum accrual the Internal Revenue Code would allow a self-employed individual, and (4) otherwise met all Code requirements for a self-employed person's defined benefit plan. The shareholder bears the burden of establishing this hypothetical figure and must submit supporting documentation with the return. If he can't meet that burden, the fallback is the flat limit: the lesser of $7,500 or 15% of his earned income from the business.

Critically, the opinion flags its own expiration date: Chapter 358 of the Laws of 1981 amended section 612(b)(7) effective for taxable years beginning on or after January 1, 1982, replacing this analysis with a comparison to the lesser of $7,500 or 15% of the shareholder's earned income from the corporation itself. This Advisory Opinion's actuarial-comparison approach applies only to pre-1982 tax years.

What this means for you

Shareholders of professional service corporations with defined benefit retirement plans (pre-1982 tax years)

If you're computing an old (pre-1982) New York return, expect to reconstruct a hypothetical self-employed defined benefit plan - matching your actual plan's start date and actuarial assumptions - to establish your true add-back amount, rather than using a flat dollar limit; keep or reconstruct the supporting actuarial documentation.

Accountants amending or reviewing pre-1982 professional-service-corporation returns

Don't apply the post-1981 flat 15%/$7,500-of-corporate-earned-income formula to tax years before 1982 - a different, actuarially-driven comparison controlled under the law then in effect, and this opinion's guidance is explicitly limited to that earlier period.

Anyone researching this topic for a CURRENT tax year

This opinion is now purely historical. Chapter 358 of the Laws of 1981 replaced this framework for taxable years beginning on or after January 1, 1982, and the relevant statute has likely been amended further since; consult current Tax Law section 612 and a tax professional rather than relying on this pre-1982 analysis.

Common questions

Q: My professional service corporation contributes to a defined benefit plan on my behalf - how much do I add back to my New York income?
A: For years before 1982, the difference between your share of the corporation's deduction and what you could have deducted through a hypothetical self-employed defined benefit plan mirroring your actual plan's assumptions and benefit accrual (capped at the Code's self-employed maximum) - or, if you can't establish that figure, the lesser of $7,500 or 15% of your earned income.

Q: Why can't I just use the flat $7,500-or-15% limit that applies to defined contribution plans?
A: Because Congress gave self-employed defined benefit plans a different, benefit-based limit under IRC section 401(j) rather than a flat contribution cap, and that limit depends on actuarial assumptions that can produce a higher or lower deductible amount than the flat figure.

Q: Does this analysis still apply today?
A: No - it applied only to tax years before 1982. A 1981 statutory amendment (Chapter 358, Laws of 1981) replaced it with a different formula for taxable years beginning on or after January 1, 1982.

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/income_ao_1981.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/income/a81_9i.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-81 (9) I
Income Tax
December 31, 1981

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. I801229C

On December 29, 1980 a Petition for Advisory Opinion was received from Shinazo Irie, 110­
35 71st Avenue, Forest Hills, New York 11375.
The issue raised is the appropriate method of computing the addition to federal adjusted gross
income required, under section 612(b)(7) of the Tax Law (Personal Income Tax), of a shareholder
in a professional service corporation which has taken a federal income tax deduction based on
contributions, paid on behalf of the shareholder, to a qualified plan.
Section 612(b)(7) of the Tax Law presently provides that in computing New York adjusted
gross income a shareholder of a professional service corporation must add to his federal adjusted
gross income the amount deducted by the corporation on its federal return for payments to a qualified
plan on behalf of the shareholder, reduced by the maximum amount which would be deductible by
the shareholder, in computing his federal adjusted gross income, for payments to a qualified plan,
if the shareholder were a self-employed individual. The limit on deductible corporate contributions
to a qualified plan, with respect to any individual employee, generally exceeds that applicable to a
qualified plan established for a self-employed individual. The effect of section 612(b)(7) of the Tax
Law is thus to require an add-back of the difference between the corporate deduction and the
maximum amount which would have been deductible by the shareholder were he self-employed.
Prior to the enactment of the Employee Retirement Income Security Act of 1974 ("ERISA"),
the "maximum amount which would be deductible" by a self-employed individual for contributions
to a qualified plan was the lesser of $2,500 or 10% of earned income "from the trade or business with
respect to which the plan is established" (I. R. C. §404(e)). ERISA raised this limit to the lesser of
$7,500 or 15% of such earned income, with respect to qualified plans other than defined benefit
plans. However, ERISA also, for the first time, made available to self-employed individuals defined
benefit plans and provided, in I.R.C. §401(j)(6), that the limitation contained in I.R.C. §404(e) is not
applicable to such defined benefit plans, instead, I.R.C. §401(j), and regulations promulgated
pursuant thereto, provide for maximum annual benefits which may be accrued with respect to each
year of plan participation. Such figure is determined based on the plan beneficiary's age at the
commencement of his participation and his annual compensation. The maximum deductible
contribution to such a plan is computed as the amount necessary to properly fund the same, pursuant
to I.R.C. §§ 404(a) and 412. Such computation clearly requires the utilization of various actuarial
assumptions, I.R.C. §402(c)(3]) accordingly provides that such assumptions as to costs, liabilities,
rates of interest and other factors "shall be determined on the basis of actuarial assumptions and
methods which, in the aggregate, are reasonable (taking into account the experience of the plan and

JAMES H. TULLY., COMMISSIONER
TP-8 (4/80)

LOUIS M. JACOBSON, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR

-2­
TSB-A-81 (9) I
Income Tax
December 31, 1981

reasonable expectations) and which, in combination, offer the actuary's best estimate of anticipated
experience under the plan". It follows that although the guidelines set forth in I.R.C. §401(j) may
have been originally intended to translate the $7,500/15% limitation applicable to defined
contribution plans into a roughly comparable limitation on the benefits sought to be ensured by a
defined benefit plan established for a self-employed individual, the utilization of varying actuarial
assumptions, as well as actual plan experience, can yield a higher (or lower) ceiling on deductible
contributions. See House Conference Report No. 93-1280, 1974 US Code Congr. Adm. News p.
5113.
In light of the foregoing considerations, the language contained in Section 612(b)(7) of the
Tax Law is to be applied as follows. A shareholder of a professional service corporation which
makes federally deductible contributions to a defined benefit plan must add to his federal adjusted
gross income an amount equal to the difference between his share of the corporate deduction and the
federally deductible contribution he could have made, were he self-employed, to a plan (1) which
commenced at the time his current participation in his corporate plan commenced, (2) the required
contributions to which were computed based on the same reasonable actuarial assumptions and plan
experience utilized with respect to the corporate plan, (3) which provided for an accrual of benefits
equal to the lesser of the accrual of benefits provided for under the corporate plan (with respect to
such individual) and the maximum accrual of benefits permissible under applicable provisions of
the Internal Revenue Code, and (4) which otherwise conformed to all limitations and requirements
applicable to a defined benefit plan of a self-employed individual under the provisions of the Internal
Revenue Code. In each instance the burden will be on the taxpayer to establish the correct figure to
be employed. Appropriate supporting documents should be submitted with the taxpayer's personal
income tax return. Where such burden is not met, the amount to be subtracted from the taxpayer's
share of the corporate deduction is the lesser of $7500 or 15% of the earned income derived by the
taxpayer from the trade or business with respect to which the plan is established. (This is the limit
provided in I..R.C. §404(e) applicable to post-ERISA years prior to 1982.)
It is to be noted that Section 612(b)(7) of the Tax Law has been amended by Chapter 358 of
the Laws of 1981, applicable to taxable years commencing on or after January 1, 1982. As amended,
such provision will require an addition to federal adjusted gross income equal to the difference
between the taxpayer's share of the corporate deduction and the lesser of $7500 or 15% of "the
earned income derived by such taxpayer from such corporation during such taxpayer's taxable year."
The present Advisory Opinion will therefore not be applicable to taxable years commencing on or
after January. 1, 1982.

DATED: November 4, 1981

s/LOUIS ETLINGER
Deputy Director
Technical Services Bureau