Age Limit for PS plan

[Guest jusducki]

Client (will be 70.5 in December) and brother (younger) own a company and want to open a Profit Sharing plan - incomes drawn from Company high enough for each to contribute $44,000.....client realizes he'll need to take an RMD by next April, etc. Question - if he chooses, can he continue to make contributions to a PS plan for as long as the Company is in business and he's still alive? Thanks.

[WDIK]

He should still be able to make profit sharing contributions based on his compensation.

Don't forget that you can utilize an appropriate vesting schedule, to delay the required minimum distributions.

[saabraa]

Yes.

Regarding RMD, I believe you can avoid a 2006 requirement if nothing has actually/physically been contributed as of 12/31/06.

[Guest jusducki]

Thank you both for responding so quickly....I don't consider myself (yet) and RMD pro - so from these two responses it appears:

RMD only required from vested portion of account balance? so if we used 6-yr graded, no RMD until end of 2nd Plan year and then only available amount for use is the 20% vested balance? (eg. 2 yrs of 44,000 contribution...20% = $17,600 so the RMD would be determined using the $17,600 as the available balance?)

I never would have thought of the vesting deal....

[Guest Pensions in Paradise]

Two additional notes. First, make sure to define normal retirement age as the later of age 65 or five years of participation. The "standard" definition is usually age 65, which would make your client immediately vested. Second, make sure to exclude all years of service prior to the effective date of the plan for vesting purposes. Otherwise, the client would be credited with years of service from the date he/she started the company.

[Lame Duck]

You can only exclude prior service for vesting purposes if there has been no other qualified plan that has been terminated in the five year period immediately preceding or following the adoption of this plan. See 1.411(a)-5(b)(3)(v). Generally, if they have had a prior qualified plan, we count all service.

[Guest jusducki]

Would a SEP be considered a "qualified" plan for the purposes we're discussing?

[Lame Duck]

I don't believe so. 1.411(a)-5(b)3(v)(B)(1) specifies that a qualified plan is one within the meaning of section 7476(d) of the code. 7476(d) defines a qualified plan as:

For purposes of this section, the term "retirement plan" means -

(1) a pension, profit sharing, or stock bonus plan described in section 401(a) or a trust which is part of such a plan, or

(2) an anuity plan described in section 403(b).

Since a SEP is governed by section 408(k), it is not covered under the definition set forth in 7476(d).

[Lori Friedman]

This thread touches on one of my pet peeves -- the way the term "qualified" gets thrown around with different definitions and for different purposes. We all know that a "qualified plan" is governed by I.R.C. Sec. 401(a). I wish the terminology were used only for that purpose. It's confusing to people when IRA's, 403(b)'s, and other arrangements get referred to as "qualified" for various purposes.

Ok...I'm feeling much better now.

[david rigby]

...so if we used 6-yr graded, no RMD until end of 2nd Plan year...

Or 3 year vesting schedule?

[Lame Duck]

Lori,

I don't write it, I just cite it.