Modest DB-Max DB Contributions

[JAY21]

Anyone had any issues or problems with a scenario with a client (one man plan) funds relatively modest amounts for his age and compensation (currently age 64 and over 200k comp) for 7 years and then in his final 3 years wants to max his funding. Using an Ind. Aggregate funding method I'm getting some pretty huge numbers given the past service/participation on the 415 limit where he previously was no where close to accruing at the 415 limit, but now essentially is "catching-up" to the 415 limit via huge accruals (amendment)and contributions. I guess I get a little nervous about this level of contribution (around 400k) though I don't see anything wrong with the math or funding method. Just curious if anyone has had any similar experiences and/or audit issues with such an approach. In the end he'll have the same maximum distributable 415 limit as someone funding more level amounts over a 10 year period, but it's just not a very smooth approach.

[SoCalActuary]

Anyone had any issues or problems with a scenario with a client (one man plan) funds relatively modest amounts for his age and compensation (currently age 64 and over 200k comp) for 7 years and then in his final 3 years wants to max his funding. Using an Ind. Aggregate funding method I'm getting some pretty huge numbers given the past service/participation on the 415 limit where he previously was no where close to accruing at the 415 limit, but now essentially is "catching-up" to the 415 limit via huge accruals (amendment)and contributions. I guess I get a little nervous about this level of contribution (around 400k) though I don't see anything wrong with the math or funding method. Just curious if anyone has had any similar experiences and/or audit issues with such an approach. In the end he'll have the same maximum distributable 415 limit as someone funding more level amounts over a 10 year period, but it's just not a very smooth approach.

Too hot to handle? No, it should not be. I have had a few of these extreme catchup plans in my career, with the largest hitting more than 700 k in one year. Just be prepared to document your assumptions upon audit, 'cause you most likely will get one.

[AndyH]

What exactly is happening to cause the increase, an increase in the plan formula? So he could have had a larger benefit (and deduction) before?

if so, you could have an a(4) issue but if there were no employees before then there is no issue. No other problems that I can thingk of.

[Guest Carol the Writer]

I don't know if this applies any longer, but would there not be a 5-year amortization of any plan aendments' costs, since there are fewer than 5 participants involved? 404(a)(1)(A)(ii)? If I'm wrong, please correct me.

[JAY21]

Carol, I believe 404(a)(1)(A)(i)- the amount necessary to fund the minimum funding if greater than (ii) is still deductible. The issue is like SoCal mentioned one of "too hot to handle". It's just one of those take a deep breath and wait for the audit and hope you didn't miss anything large or small as you know you're painting a target on the client's chest (and mine) and service wil be looking to poke holes in something or everything, though ultimately I believe we should be ok. Yes, the benefit formula was recently amended to a much higher formula and with only a few years to assumed retirement (yes, realize that's a critical assumption) the minimum funding is very large.

[SoCalActuary]

This issue can come from plan amendments, investment losses late in the life of the plan,

or sudden increases in compensation that push the benefit up.

In the case I cited, we had EGTRRA benefit increases as well, since the NRA was below 62.

Remember the late 80's Arizona cases: to paraphrase - "the assets must be there when the person retires"

which is the principle behind catching up the assets to be sufficient at NRA.

If you want to fund on 3% interest and a mortality table where people don't die until age 95, then

the IRS might want to deny your deductions. But if you are funding for a reasonable lump sum at

retirement that matches the plan's payout assumptions without exceeding 415, you should be

comfortable with the high deductions. After all, they are a business necessity to meet the obligation

of the plan for the employee.