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When can a sole member/participant have a DB plan?


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Why would you think he has to have 3 years of compensation? This would be an awful condition to establishing a defined benefit plan.

The average compensation will be determined as the LLC progresses into the future.

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No he doesn't.  I understand that the 415 limit is 100% of the three year average of compensation, but when you have less than three years of compensation you shorten the averaging period to the number of years you actually have.  By "have" I mean the length of the participant's employment period, not that you can't find the records or that their compensation was zero.

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Just be careful if this is an LLC taxed as a sole prop, because if you wipe out all of his income than your three year average drops in years two and three and you can end up with an overfunded plan.  Careful planning is required.

 

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You will need to split his income into contribution and post-contribution net-earned income that has to support the contribution. Generally he may need to make only minimum required contribution during first 3 years to establish higher net-earned income. Very careful planning is required for the first 3 years where contributions should be made after the year end when the net income is known. This why in certain cases it is not beneficial to have a defined benefit plan for a new company for at least first 2 years, especially if income is not projected to be high enough.

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