I'm getting sick of this question.

[Penman2006]

I can't remember how many times the small business owner(s) that is gung ho to set up a DB plan wants to know how often they can change their contribution amount. It's reasonable that the business owner(s) wants to know what the committment of starting a DB plan entails. I am comfortable saying that there is not a problem making cutbacks due to unforeseen changes in the financial condition of the business. I am not comfortable saying that the plan can be amended every X years to change the owners contribution level. Sometimes they are most worried about not being in a bind if business drops off but often it seems that they are more concerned with as much flexibility as possible. I say that's the tradeoff with DB plans, higher deductible contributions but less flexibility. They always want to know if they can amend the plan every 2, 3, 5 years. I'm not comfortable with answering that question. Personally I don't think any small business owner knows what things will be like in 5 years but I think that they should start a plan with the idea that they could maintain their initial contribution level for 3+ years barring unforeseen problems. If they can't make that committment then a DB plan is not right for them. I think there is some case law where the IRS has disallowed deductions due to too frequent plan amendments so that the plan was basically operating like a discretionary PS plan but with much higher contribution amounts. I'm guessing that involved annual amendments. I don't like to play games, but I don't want to misinform the potential plan sponsors either.

I'd like to know how others handle this question.

[Mike Preston]

How much to say to a client about this issue is a judgement call. Certainly some form of it must be communicated to everyone. But there are some where you will be planting a seed that you would rather not plant if you go into too much detail. There are others where it is imperative to give them as much insight into this issue as possible. Some are stuffed shirts and need chapter and verse. Others are easy to deal with and some good (and fun) analogies make for a light-hearted, but informative, conversation.

[SoCalActuary]

Send those troublesome clients to us.

[John Feldt ERPA CPC QPA]

I think there is some case law where the IRS has disallowed deductions due to too frequent plan amendments

I'd like to see that case law, we'll take the ones that don't want to work with SoCalActuary.

[Andy the Actuary]

Yes, I lay out the usual parameters: Substantial sustained contributions should be anticipated. This is not stop-and-go and there is limited flexibility: We do not discuss the abilitity to amend the plan to control contributions other than if there is a crisis business condition that would warrant a permanent change. There may be qualification issues if the plan is terminated too soon. Make the pension plan your most convervative investment element of your portfolio to avoid overfunding. If this doesn't fit the (small client's) objectives, then suggest a more flexible arrangement. And they all nod affirmatively.

Then, all this being said, in the most controlled of laboratory environments, organisms do what they damn well please.

I have determined a guaranteed method for controlling these situations: I'm not engaging any more one-person or small professional plans. But, would suggest you don't try this at home unless your home is paid for.

[JAY21]

I'm curious about this myself if any court or IRS has disallowed contributions due to frequent DB amendments. If anyone has anything more on this please share. thanks.

[Penman2006]

They are not troublesome clients. It is more like Mike Preston expressed, I don't want to unintentionally plant any seeds that will come back to haunt me. It's tough because it's a grey area.

SoCalActuary and J4FKBC are you saying you are comfortable with annual benefit formula changes as the client desires?

[tymesup]

With 150% of current liability and beginning of the year valuations, there should be a fair amount of flexibility available.

[Mike Preston]

Here's a nasty interpretation for you. Are you using your GUST document to adopt a db plan rather than a not-yet-approved EGTRRA document? Are you adopting the plan document and then providing for the applicable EGTRRA amendments? If so, are you stuck using the 150% rule solely on the pre-EGTRRA compensation limits? <evil laugh>

[SoCalActuary]

Comfortable? No, but if that's how the client gets to save for retirement, and I don't have a better way to meet their needs, then the amendment is appropriate.

I have even considered the idea of designing a plan that has a minimal 0.5% annual accrual on compensation, then amending up annually by 3/15 to meet their budget. But with PPA, that would not be as useful as the flexibility of 150% contribution range, and I can't have both choices.

Now that we are going away from projected funding methods in 2008, the late amendment will not give as much downside potential as it did before. We used to be able to spread the cost of benefits over a much longer period than the accrual of the benefit, but no longer.

By the way, I don't see much problem with EGTRRA and the 2 year rule, provided they adopted a good-faith amendment in 2002 or 2003.

[Mike Preston]

I was talking about plans that were new in 2005 or 2006 or are new in 2007 and maybe 2008.

[thepensionmaven]

Business is business. Send them to us.

Steve

[Penman2006]

Okay Steve, I'll send them all to you. While I'm at it I'll give you all of my other clients as well, what the heck.

I would like to rename the topic: "I want to answer this question responsibly".

[Guest mingblue]

This question brings back interesting memories for me - several years (mid to late 90's) ago I worked for a small insurance agency that was into life insurance, financial planning, & last but not least small pension plans. One of the partners could sell snow to an eskimo. Small businesses wanted large deductions but flexibility and so this guy would sell DB plans as Profit Sharing plans. One of the most memorable was a one man sheet rocking company. The owner and his accountant loved the DB plan for 2-3 years while business was booming. Then they had a big slowdown and the owner would call me and say that he didn't want to contribute for the current year. His fallback was " Bob said it would work this way, totally flexible" .

These clients usually had less than 100,000 in plan assets and therefore didn't have to file a Schedule B - Bob would quietly terminate these plans when things heated up too much.

[FAPInJax]

In the old days, (read - walking to school in the snow uphill both ways <G>), we would advise the client regarding the possibility of amending the plan. We never told them any specific time frame (like every X years) but rather if the business circumstances warranted a change then we would present options. However, they would be encouraged to not do so every year and we never had a problem with the IRS questioning any of the amendments. All our valuations were performed at the beginning of the year and therefore the accountant and client had the numbers way in advance of their tax filing and we contacted them in September / October to see whether everything was OK.

[Larry M]

In the old days, ...... All our valuations were performed at the beginning of the year and therefore the accountant and client had the numbers way in advance of their tax filing and we contacted them in September / October to see whether everything was OK.

Frank,

What kind of radical are you? Beginning of year valuations??

The nerve of giving your client and his/her accountant the range of contribution for the coming year.

How could they survive not having to scramble at the last moment to determine (a) how much contribution was needed, and (b) where to get the cash?

Heresy, that's what you are practicing.