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b2Kates- Thanks for the reply. We are a third party plan administrator who sells no investments and usually directs clients to consult with their CPA regarding tax matters. Seems like we often come up with advantageous plan designs that lead to great savings for small employers, but we never give tax advise. For one thing, we're only one peice of the puzzle and dont have nearly enough information about a client to advise them in tax matters, nor would we want to. Hog factor - that's funny. Now, I could see, if a plan became disqualified or a client had to pay high penalties for non-filing, or a participant sued an employer over a mistake we made. But it seems like she is stretching it - indeed the hog factor. Thanks again.

We just terminated a 1 participant DB and received a favorable Determination Letter. Initially, the client approached us about a DB because she received a $2 million referral award from a law firm. She was age 63 and a sole proprietor. We set up the DB to have NRA of 65 and 3 years of participation. We also suggested she incorporate as an S-corp so she could carry back the losses created from the large pension contribution to the year she received the high income. This probably saved her $200,000 in income taxes. Two years ago she needed some money to remodel her home and tapped $50K from her IRA. Of course, this had the effect of reducing the loss carried back to the high income year by $50K. Now, after all is done, she wants to sue us for the $24K in income tax she paid in relation to the IRA distribution. Nobody in our office recalls talking to her about any IRA distribution. She claims we did not properly counsel her regarding the taxation of her IRA distribution. Anyone have any experience with such a matter? Thanks

We administer a 1 participant / 1 employee DB that was adopted and effective 1/1/00. The owner (100% shareholder) sold his old company to another firm that purchased the assets of the company. The 3 employees he had, terminated employment in 1999 before his new corporation adopted the DB plan. The income he is using to fund the plan is flowing into his corp from the sale of his old business. Payments stopped in 2001 so we amended his plan to reduce the benefit to prevent any funding requirement in 2002 (the year he will have less income). We changed the benefit from 60% of FAC to 10% of FAC. He now wants to somehow provide a benefit to one of his former nhce/ non-key employees. I thought perhaps we could amend the plan to get rid of eligibility and change accrual to one hour of service. He could then hire his former employee for one day and provide the tax-deferred benefit he wants. We could acheive this by having a benefit formula for non-owner employees of say 50% of FAC. FAC is defined as the highest 3 consecutive years of all years including years with a predecessor employer. I dont see a problem passing 401(a)(4) in 2002 as we should pass using the annual method. He will terminate the plan in early 2003. Anyone see a problem with this? Thanks

Thanks for the answers Frank and PAX. In this case the guy does not want a contribution. He did not work the required 1,000 hours this year. If we amended the plan to freeze benefits (signed prior to 15 days before year end), would he have a funding requirement (assets approx 100K and PVAB approx 90K)? It seems he would not if we were running end-of year. What if we continued with beginning of year? Or would it make a difference in terms of a required contribution? Thanks.

We administer a one participant DB (sole proprietor). The plan was effective 1/1/2000, has assets of about 100K and PVAB of about 90K. He worked less than the required hours to accrue a benefit this year and wishes to freeze the plan. Is there any problem with freezing benefits, switching to end of year and avoiding required contributions this year? Is it even necessary to switch to end of year to avoid the contribution requirement? He expects the business will be profitable 2-3 years down the road. What happens if he is profitable next year? Is that too soon to unfreeze benefits? We have communicated that a DB cannot be amended / altered every year and must generally be permenant in its design. Thanks!

Hi All We currently administer a small defined benefit plan with two participants (husband and wife). The plan has been in existence for 5 years and has a $10,000 annual minimum benefit. My understanding is that any participant with the $10,000 minimum must receive the benefit in the form of an annuity. What happens if the wife (who has the minimum benefit) dies? Is her primary beneficiary (the husband) prevented from electing to receive her benefit as a lump sum? Thanks