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Guest ceg73

404(a)(5) timing rule

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Guest ceg73

A prospective client came to me with the following recommendation from a consultant.....

Client owns 100% of S corp (X). X will set up nonqualifed plan (N). Client will also set up a management company (Y) organized as a C corp. Y will employ client. X will pay Y a management fee. X will also pay and deduct amounts contributed to Y as nonqualified plan contributions each year. Y will include this as taxable income. Y will transmit the contributions to a trustee to hold for the benefit of client. Y will also receive a plan admin fee each year, which it will include in income. Y will pay payroll taxes when the amounts vest with the client. Y will deduct the contributions in the year in which client includes amounts in income pursuant to 404(a)(5).

At first glance it seems that each step in this plan is okay, but together it almost seems too good to be true. Y can manage it's taxable income to get the benefit of the 15% corporate rate vs. the shareholders higher personal rate. Further, the S corp gets the benefit of an immediate deduction with the inclusion of income not occuring until some future date.

What am I missing here?

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