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New Defined Benefit Plan for 2020


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The sole proprietor's 2020 personal tax returns are on extension.  The sole proprietor will currently adopt a new defined benefit plan for 2020 effective 1/1/2020.  The plan's benefit formula will be 10% of average monthly compensation x years of participation.  The participant's accrued benefit as of December 31, 2020 is equal to $1,916.67 (or 1/10 of the 2020 IRS dollar limit).

 

Can the plan be designed with a $2,000.00 maximum monthly benefit and not run afoul of any IRS rules?  The objective is to limit the 2021 accruals such that the required minimum contribution for 2021 is $0 or a very small amount.

 

A year of benefit accrual service is based on 1,000 hours of service.  The sole proprietor has already worked 1,000 hours during 2021.  Does limiting the 2021 benefit accrual through the use of a $2,000 maximum monthly benefit violate the anti-cutback accrual rules or anything else?

 

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2 hours ago, jane murray said:

The sole proprietor's 2020 personal tax returns are on extension.  The sole proprietor will currently adopt a new defined benefit plan for 2020 effective 1/1/2020.  The plan's benefit formula will be 10% of average monthly compensation x years of participation.  The participant's accrued benefit as of December 31, 2020 is equal to $1,916.67 (or 1/10 of the 2020 IRS dollar limit).

 

Can the plan be designed with a $2,000.00 maximum monthly benefit and not run afoul of any IRS rules?  The objective is to limit the 2021 accruals such that the required minimum contribution for 2021 is $0 or a very small amount.

 

A year of benefit accrual service is based on 1,000 hours of service.  The sole proprietor has already worked 1,000 hours during 2021.  Does limiting the 2021 benefit accrual through the use of a $2,000 maximum monthly benefit violate the anti-cutback accrual rules or anything else?

 

With a general caveat that we don't know what we're doing with respect to retroactive adoptions and therefore all we can do is good faith compliance, what you describe should work the way you want it to without problem.

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On 6/28/2021 at 11:33 PM, Mike Preston said:

With a general caveat that we don't know what we're doing with respect to retroactive adoptions and therefore all we can do is good faith compliance, what you describe should work the way you want it to without problem.

Hi Mike-

Are you saying that a sole proprietorship on extension still may be able to adopt a new qualified plan effective 1/1/2020? Emphasis on "may", meaning a possibility, because of your caveat. Just curious.

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2 hours ago, kpension said:

Hi Mike-

Are you saying that a sole proprietorship on extension still may be able to adopt a new qualified plan effective 1/1/2020? Emphasis on "may", meaning a possibility, because of your caveat. Just curious.

Adopt a plan for 2020? Absolutely. His caveat was related to the benefit accrual formula part of the discussion.

William C. Presson, ERPA, QPA, QKA
bill.presson@gmail.com
C 205.994.4070

 

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3 hours ago, kpension said:

Hi Mike-

Are you saying that a sole proprietorship on extension still may be able to adopt a new qualified plan effective 1/1/2020? Emphasis on "may", meaning a possibility, because of your caveat. Just curious.

No, there is no doubt that retroactive adoption is allowable.

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  • 2 weeks later...

Related question - What do you do about a new plan for 2020 and a 5558?  Does this effectively put the latest adoption date as 7/31 since you'd have to file a 5558 by then to extend the deadline?

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There due date of the 5500 is automatically extended to the sponsor's tax filing deadline, as long as the sponsor's tax year is the same as the plan year. If you adopt a plan on September 14, that leaves you 1 day to get your minimum funding done and prepare and file your 5500.

Another possibility is that you just add $750 for a DFVCP filing to your plan setup costs.

Free advice is worth what you paid for it. Do not rely on the information provided in this post for any purpose, including (but not limited to): tax planning, compliance with ERISA or the IRC, investing or other forms of fortune-telling, bird identification, relationship advice, or spiritual guidance.

Corey B. Zeller, MSEA, CPC, QPA, QKA
Preferred Pension Planning Corp.
corey@pppc.co

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4 minutes ago, C. B. Zeller said:

Another possibility is that you just add $750 for a DFVCP filing to your plan setup costs.

No need.  IRS and DOL are well aware of the issue, but haven't worked out the practical solutions yet.  Simply be prepared to follow up on correspondence and explain that it was a retroactively adopted plan, the filing is not late even though it is filed after the 5558 deadline.

 

 

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  • 2 weeks later...

I fully agree that we can adopt a plan now for 2020 (under the right circumstances). But what if we adopted a plan in 2020 with a 1/1/20 effective date, and we just now decided we wanted to have a more liberal eligibility (age 18 instead of age 21). Logically, we should be able to do this, or else the employer who procrastinated has an advantage over the one who didn't. I don't know of anything that gives us this ability. Does anyone else?

Even if we CAN amend eligibility, am I correct that a participant would not have been able to have a 401(k) deferral for 2020 because the plan has to be adopted before that deferral takes place?

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The Act allows you to set up a new plan it does not allow you to make post year end amendments to an existing plan.

It's kind of a pain, but in your case you could set up a new (second plan) plan in 2021 for 2020 and then merge it into the old plan in 2021. Kind of a hassle but it is an option.

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6 minutes ago, still learning said:

Logically, we should be able to do this, or else the employer who procrastinated has an advantage over the one who didn't.

Logically yes, but legally, no. If memory serves me right one of the bills currently floating around Congress has a provision intended to fix this and allow retroactive amendments.

Free advice is worth what you paid for it. Do not rely on the information provided in this post for any purpose, including (but not limited to): tax planning, compliance with ERISA or the IRC, investing or other forms of fortune-telling, bird identification, relationship advice, or spiritual guidance.

Corey B. Zeller, MSEA, CPC, QPA, QKA
Preferred Pension Planning Corp.
corey@pppc.co

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  • 2 weeks later...

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