Deminimus Benefit

[Dougsbpc]

Have a small DB plan that provides the deminimus benefit. The plan is co-sponsored by two sole proprietors (each participants in the plan and no other employees). One sole proprietor has yet to make a profit. Can we provide him with the deminimus benefit even though he has only had negative earnings so far?

[Blinky the 3-eyed Fish]

Yes, the deminimus benefit overrides the Hi-3 compensation limit, so compensation is not needed.

[Guest RSNOW]

A related point, a few years back some IRS Audit guidelines essentially stated that the 10k De Minimus benefit was payable only as an annuity, and not as a lump sum, if a participant lacked an actual high-3 compensation avg. of 10k. We've adhered to this IRS position but I'd love to hear if anyone disagrees and feels the De Minimus benefit can be paid as a lump sum even if actual high-3 average wouldn't otherwise support it.

[david rigby]

From Gray Book:

QUESTION 94- 22

Lump Sum Availability of Section 415(b)(4) Amount -- 415

Under section 415( b)(4), a defined benefit plan may pay up to $10,000 per year (regardless of age) if the employee has no defined contribution benefits from the employer. Assuming that such amount exceeds the otherwise determined 415( b) limit, can it be paid in the form of a lump sum?

RESPONSE:

No. IRC Regulation 1.415-3(f)(4) states: "Computation of $10,000 Amount. For purposes of subparagraph (1)(i) of this paragraph, the value of the retirement benefit payable under the plan is not adjusted upward for early retirement provisions and benefits which are not in the form of a straight life annuity (whether or not directly related to retirement benefits)." In other words, no upward adjustment in the $10,000 is allowed for payment in a form other than straight life annuity, including a lump sum.

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[David MacLennan]

He may not want to make a contribution if he has no earned income. If the sole proprietor has no net income, he cannot deduct any portion of the contribution due to the 404a8C limit. There is nothing explicit in the Code that allows someone to carry forward the deduction or to establish a tax basis, so what amounts to an after-tax contribution would then be taxed again after distribution from the plan.