Starting a 1 person DB Plan

[FJR]

Is it permissable to start a DB plan and fund the max. allowed in that year and then terminate it the following year? Reason for terminating is there is no more consulting wages going forward.

Much appreciated

[SoCalActuary]

Look at the provisions in 401(a) regarding permanence.

We advise people in your situation to have the plan at least 3 years to meet the presumed requirement for permanent plan.

First year is a non-calendar fiscal year, taking part of the income for pension.

Second year, take the remaining consulting income.

Third year, amend formula down and prepare to terminate the plan.

[Guest lerieleech]

Generally, I would feel a lot better if the plan didn't terminate for at least three years. But it could depend on whether the lack of income was because of unforeseen circumstances.

Some years ago, I set up a plan with about seven people. The owner put in a large contribution in the first year, and fully intended to keep doing that into the future. But then his business circumstances changed suddenly, and he could not afford the plan. Partway into the second plan year, we terminated the plan and applied for a determination letter with IRS, stating what happened, and IRS approved the termination.

[AndyH]

Agreed. The intent to maintain permanently is sufficient, in my experience.

I've always told prospective clients that they should commit to five years, not three, but there really isn't any rule on this as far as I know.