A target benefit plan provides for a funding of a benefit of 50% of pay. For the sole owner of the plan sponsor this produces the desired contribution for himself and an acceptably low contribution for his younger employee. Then the employee quits and is replaced by an older employee. In fact the new employee at 68 is 3 years older than the plan's retirement age.

It seems to me that her normal cost is going to be several times her annual pay. In years past this was limited to 25% of her pay by §415©. And now it is limited to 100% (since her annual pay is less than $41,000).

If he contributes 100% for her and 25% for himself, then it appears to me that 75% of the contribution for her is not tax deductible. And further that he may incur the 10% excise tax on the nondeductible contribution.

Hopefully, you can lead me to a different conclusion.

Oops - just read it more clearly. Please ignore my earlier reply.

I think you got it right, Jed.

Just one idea, and I don't know if it works or not. How about contributing the full amount by the minimum funding due date but only contributing and deducting 25% of pay by the tax return due date.

This is just a shot in the dark. I'm not certain without researching it if the second part would be deductible in year two as it would for a DB plan. Also I'm not sure if there are other issues that might result. Just a quick thought.