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Suppose you have a sole proprietor who came up with an Engineering process and had significant schedule C profit for the first two years. The third year he spent all of his time making the idea / process better but had no income for that year and did not even file a Schedule C. In the fourth year, he adopts a defined benefit plan but has not been quite as successful as he was in years 1 and 2.

Per the document, the plan can count past compensation if elected. Can the plan count his first 3 years as his average compensation even though he filed no schedule C the third year? He claims he worked harder and longer in year 3 than any other year. 

Thanks.

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For an employee with a break in service I believe you ignore the break, so you'd count years 1, 2 and 4. I don't know if having no profit in year 3 could be considered a break, where you could similar, but I don't see why year 3 can't go into the 3-year average as a zero.

Kenneth M. Prell, CEBS, ERPA

Vice President, BPAS Actuarial & Pension Services

kprell@bpas.com

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