Sole prop income during year of plan termination

[dmb]

A one life (sole prop) DB plan, end of year val. Client wishes to terminate and roll money into IRA before end of 2005, but expects considerable income and would like to use income and make a contribution for 2005. Since self employment income is considered earned on 12/31, is there a way to terminate the plan prior to 12/31, but still use the 2005 income?? Thanks.

[Gary]

I don't see a problem with this situation.

Say the termination date is 7/1/2005.

First I would check if a year of service is credited based on plan terms.

Next I would compute accrued benefit based on plan terms for compensation and average compensation. I don't know terms of the plan, but I don't see why you couldn't use net earned income through 6/30/05 for the calculation of accrued benefit? A plan term of 7/1/05 is no different then an employee teminating at 7/1/05, so why not just compute it as if the individual terminated at that time if that helps.

[Blinky the 3-eyed Fish]

Dmb, I don't agree with the notion that self-employment income is earned 12/31, rather I think a reasonable determination of compensation should be made. Now while you could try and physically calculate the true earned income up to the date of termination, that very well may be impossible to determine. Instead a proration of the total year's income through the date of plan termination would seem to be reasonable to me. Of course then you won't have an earned income figure by the end of the year and won't be able to distribute possibly unless you can guess the income, run the valuation and have him contribute an amount that ends up satisfying the final valuation's minimum amount but is not over the maximum amount. Good luck if you want to guess on that.

[JAY21]

Consider amending the plan to a high-3 average if it's currently a career average (including years before plan inception) since there is no additional employee costs to be concerned about.

[AndyH]

I'll second both the last two comments and just add that it seems to me that doing end of year sole proprietor DB vals for clients that don't get Determination Letters before distributing assets on termination seems like a difficult line of work.

[dmb]

I appreciate all the input. fyi: The plan is currently High 3 yr avg. Thanks.