New Plan for S-corp

[Guest DCquestioner]

Prospect is an S-corp that has never taken W-2 in the past. She intends to take W-2 for the first time in 2008. If a new plan is set up for her, and I run it as an end of year valuation to account for the salary she takes in 2008, will I have a funding target that can be used to maximize her deduction?

She has the past service to give her a benefit, but as of the beginning of the year, her average salary was $0?

Any thoughts would be greatly appreciated.

Thanks!

[J Simmons]

If the S Corp is audited, how will she justify no W-2 prior to this year, and now all of a sudden W-2 wages? Did she not perform personal services for the S Corp prior to this year?

[Lou S.]

Form a plan standpoint I don't think you will have a problem.

You will still be limited to the 10% participation phase in on the dollar limit.

If you are trying to justify the 100% comp limit (because it may be lower than the phased in dollar limit) you might get challeged by the IRS if you are claiming past service for years with no W-2 wages but pass through dividend S-corp income.

[Guest DCquestioner]

This question seems to be running parallel to another current post on the board, but I suppose that another way to ask the question is to ask if the funding target is calculated on the val date or at the beginning of the year for purposes of calculating the maximum deduction?

So if I'm doing an EOY valuation, it doesn't look like there's a problem. Does that make sense?

[Guest RBlaine]

This question seems to be running parallel to another current post on the board, but I suppose that another way to ask the question is to ask if the funding target is calculated on the val date or at the beginning of the year for purposes of calculating the maximum deduction?

So if I'm doing an EOY valuation, it doesn't look like there's a problem. Does that make sense?

Isn't the FT the end of year present value of the BoY accrued Benefit? If the BoY AB is $0, then your FT is $0. Or, I've misunderstood you.

[ak2ary]

She can of course accrue the 10000 deminimis benefit as of the first day of the first plan year since it is less than 1/10 of the dollar limit and is not subject to the 100% of pay limit

Then as she takes actual real w2 pay she will get her own 100% of pay limit of greater than 10,000 by the end of the first year and will never have to deal with that limit again.

Of course, to generate funding target you must have the 10000 acrue as of the effective date (first day of the year) or its not in the funding target, regardless of the val date.

Make sure you pass the 411(b) accrual rules.

[tymesup]

The 10,000 minimum benefit is pro-rated for service less than 10 years, so it's not going to help a whole lot.

[ak2ary]

I assumed from

She has the past service to give her a benefit, but as of the beginning of the year, her average salary was $0?

that she had the service

[GBurns]

How does she get past service if there was no W-2 ?

[ak2ary]

From the description above...it is clear she has issues from earlier years with underpayment of FICA

But that is well beyond the scope of this post

[J Simmons]

But since those S Corp earnings from earlier years were treated as dividends and not W-2 compensation, how do you at this time for plan purposes get to recharacterize part or all of such 'dividends' as 'compensation' just because its convenient for plan design purposes to do so?

[Blinky the 3-eyed Fish]

Compensation is not a requirement for a year of service.

[J Simmons]

Compensation is not a requirement for a year of service.

Thanks, 3-eyes