Beginning of Year Valuation

[Dougsbpc]

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!

[FAPInJax]

I would attempt to amend the plan to limit benefits while maintaining the beginning of the year valuation date. Changing valuation dates while not difficult is considered a change in funding method (unless they changed the rules again) and you would be limited in switching back.

An amendment in subsequent year(s) would not, in my opinion, be a problem.

[david rigby]

I agree with Frank. He is correct about the change in funding method related to changing the valuation date. Note that Rev. Proc. 2000-40 (and all similar earlier revenue procedures) gives permission to change the valuation date to the first day of the plan year. To change to the last day of the plan year is a change that requires IRS approval.

But a slightly different issue: for a one-participant plan, the issue is not how many hours he worked, but how much he can afford. If the participant still has cash to put in the plan, he still can do so. You might need to amend the plan as Frank has suggested, preferably before 12/31/2001, but you can also amend the plan to remove the hours requirement, thus permitting an accrual during the current year.

[Dougsbpc]

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.

[david rigby]

Assuming I understand your facts:

It seems that you are searching for an amendment that freezes benefit accrual retroactive to the first day of the plan year. Of course, IRC 411(d)(6) tells us that the amendment cannot reduce any accruals as of the later of the effective date or its actual adoption date. Since he had less than 1000 hours as of the adoption date, he did not accrue any benefits beyond the beginning of the year. Thus, your retroactive amendment would accomplish your goal.

Then, it appears that the minimum funding requirement will be limited by the Full Funding Limitation, again accomplishing your goal of zero contribution, using a BOY valuation date.