Freezing Money Purchase Plan for Self Employed

[Guest mo]

Self-employed person (no employees) sponsors standardized money purchase plan. If she freezes the plan before the end of the year, do you think she can get out of making the contribution on the basis that her self-employment income does not accrue to her until the last day of her tax year? There is similar logic in the 401(k) regs but I haven't seen this particular spin.

[Dave Baker]

I like your reasoning! Between now and the end of the year, some huge loss might wipe out the year-to-date apparent net earnings.

I've always disliked the position that a money purchase pension plan can't be terminated during the year without having to fund the specified percentage of compensation through the termination date. I see a money purchase plan's annual benefit accruing on the "allocation date" specified in the plan document, almost always the last day of the plan year. The percentage of comp formula is just a way of measuring how loud the bell rings when it rings. Killing the plan (at least with the required 15 days advance notice) before the allocation date seems to me to eliminate the funding requirement altogether.

[Everett Moreland]

The following may relate to your question: Proposed Treasury Regulation § 1.412(B)-4©(4); Revenue Ruling 79-237, 1979-2 C.B. 190; Private Letter Ruling 8652036.

[Lynn Campbell]

I worry about Standardized prototypes because they generally do not include an end of the year requirement and doesn't that create a problem if you want to terminate the plan now and not fund for 1999?

[Guest mo]

There is NEVER a last day employment requirement with a standardized prototype. But the point we are raising is, since the individual is self-employed, have they really earned any compensation yet?

[Guest mo]

Dave, I am sure you will like Everett's cites!

[Guest Donkey Kong]

I have found it difficult to freeze money purchase plans in all cases. It often seems as if the files and papers require something colder than ice.