Search the Community

I recently received a letter from the actuaries for my DBP not to make a contribution for 2012 since the plan is overfunded. I am wondering if I should ignore their advice and still make a 2012 contribution since I know in the coming years my income will be falling? The actuaries gave a 2012 contribution range of 0 - $343,250 which is a big range, but said it is best not to contribute anything. I have a DBP which is a qualified plan, that I started at age 40 with a RA of 55. I am presently 48 years old and every year since I started the DBP my compensation has been over $500K allowing me to make the maximum contribution to the DBP . The plan assumes a rate of return for both pre & post retirement at 5% Current trust assets as of 12/31/2012 were $1,040,000 and exceed the maximum distributable amount as of 12/31/2013 which is $1,025,000. So that means the trust is presently and will be at the end of this year 12/31/2013 overfunded providing the assets don't decrease in value due to market fluctuation. So my question is what is the most I can contribute for 2012 and a strategy to work out the overfunding issue? My business is setup as a sole proprietor (entire business is just me - no employees) I believe with DBP the overfunding tax penalties is something like 93% (50% Excise Tax, 39.6% Income Tax, 0.9% ObamaCare surtax, and say 3% SE Tax). I don't understand when or how these penalties kick in. When a DBP is overfunded one has several years to allow the trust assets to return to the maximum distributable amount by typically not making a contribution for a year like the actuaries are recommending. Since 2013 brings many higher federal taxes (35 > 39.6%) plus the new Medicare taxes (0.9% for income above $200K & 3.8% on unearned income) I had accelerated income from my business in 2012. Not making a contribution to my DBP for year 2012 results in me having a much much higher income tax bill for 2012. My business does not have a great deal of expenses since I am in the wholesale business where I just buy and sell and work on the margin. My biggest expense on my Schedule C is the DBP and Solo 401K contribution. What needs to be factored in for future contributions to my DBP is the direction of my business which is going downhill. My business has done well over the years but I the business slowing down dramatically, almost free falling. I would guess in 2013 the business gross profits would be in the range of $350K - $500K. Then in 2014 gross profits in the $200K range. Again these are gross profits and just guesses and the could be lower. It would be a true miracle if they are higher and extremely doubtful since I want to work a lot less. In 2015 thru 2020 (retirement age for my DBP is 55 which is year 2020) I want to work very little and I could keep the business running even if this means selling items on ebay (whatever it takes to qualify that the business is still in existence). So if I do make a contribution for 2012 to my already overfunded DBP I think I could have several years ahead to adjust for overfunding issues. Also any contribution to the DBP is limited to my compensation - 1/2 SE Tax so how would this effect the overfunding issue if my compensation from my business is $50K in years 2015-2020? For 2013 the contribution the actuaries gave me were even broader with $595K and this time a minimum of $100K. I definitely want to make a contribution in 2013 because of the higher taxes. So if this means zero contribution for 2012 I guess I need to do this. I would rather pay taxes in 2012 verses a 93% overfunding tax penalties. Hopefully people on this forum can reply back with a strategy for me to follow to maximize my contributions for 2012 and 2013 which will be my higher earning years and then in 2014 and beyond a true drop in business income. I really would like to stop operating my business and retire in 2017 but I think with this overfunding I'll need to have the business start open until 2020. I know about the strategies of Adding Plan Participants, Transfer Assets to Replacement Plan, Increase Plan Benefits and Merger of Plans but none of these will work for me. My strategy if allowable under IRS and ERISA regulations is to make contributions in 2012 thru 2014 and the DBP will be grossly overfunded and then make no contribution from 2016 - 2020 since I'll let the business run part time and will generate very little income, but during this time the trust assets to return to the maximum distributable amount.