new DB plan for one participant

[Lori H]

A builder, who earned in the 7 digits last year, is concerned that the market might go south and he would not have the funds to fund a plain, one part DB plan in a down year. I understand that the funding requirement is somewhat based on income, yet what other considerations should be given if in fact he can not fully fund the plan? He wants to put away as much as possible. What would be the pros/cons of overfunding the plan in a good year, to make up for a possible future underfunding?

[Mike Preston]

Set up a cash balance plan (or any other defined benefit plan that has an accumulation formula) with a formula a function (multiplier) of compensation. No compensation? No, or very little anyway, funding. Life is so simple sometimes.

[Lori H]

412(i)???? withOUT life insurance??? what if he underfunds the DB plan? What excise tax penalty is he looking at?

[Mike Preston]

"412(i)???? withOUT life insurance??? what if he underfunds the DB plan? What excise tax penalty is he looking at?"

I'm not sure what the above is asking, since it doesn't seem to be related to the initial post or to my response. Is it in response to a message that has subsequently been deleted?

[AndyH]

A 412(i), due to it's level premium requirement, is the exact opposite of what this builder needs, which is probably why so many of them were sold.

And he probably needs life insurance.

Interesting suggestion from Mike if you don't mind doing end of year valuations or some simulated approach.

[John Feldt ERPA CPC QPA]

Mike, you're suggesting using current compensation for the current year's accrual - right?

Just a word of experience regarding builders that we have set up DB plans for in the past. Make sure when the plan is actually established that they truly have cash available to fund the first year contribution at least, not theoretical cash.

They have strong tendencies to tie up almost all available cash into their next project or projects. When that first funding deadline comes around, they think some of their properties will have sold by then (problem #1). Or, if some properties did sell, they will have already tied that cash up again in another new project because that's how they've always operated (problem #2). And, even if some properties did sell and they did fund their plan, then they want to use the plan's cash to fund the startup of another building project (problem #3).

Resisting the lure of getting into a new project right now with that available cash is very difficult to overcome for some builders.

[SoCalActuary]

Mike's suggestion of a CB plan makes great sense. Here's another approach.

412©(8) is also helpful. Use a very modest benefit formula in your basic document,

with a one year high accrual and low future benefits. This could be done with a five year

grant of past service for example.

Overfund by 50% in the first year. If the plan sponsor can afford the plan in year two,

add an amendment retroactive to the beginning of the funding year by 3/15 of the next year.

If not, use the prior credit balance to pay for the second accrual.

[tymesup]

If you fund for 150% of the accrued benefit for the first two years, that should give you enough cushion to take care of the third year if it's a downer.

You're looking at excise taxes if you underfund or overfund.

No employees? Get it in writing.

[Lori H]

Very interesting posts. Thanks for the information.

This builder was initially wanting to fund the plan with personal non qualified investments, after explaining that the plan had to be funded with the corporate account, he wasn't so warm with the idea of a DB plan. Might present the cash balance option to him.