PPA and End of Year Valuations

[mwyatt]

Been thinking about this one and not sure of the correct answer.

Say I have an existing 1-man DB plan which we have been valuing as of the end of the year using Individual Aggregate Actuarial Cost Method. Owner is a sole proprietor so that we have had to do some iterative calculations to determine Net Earned Income (Sch C less SET deduction less contribution) for the year.

We now turn to PPA 430 and 404(o) calculation methodology for minimum and maximum funding. As we've seen in examples, there can be a pretty wide range of calculated contribution between minimum and maximum. Seems to me, thinking about it, that to determine 430 minimum we would again do our iterative methodology to determine NEI for 2008 based on assumed minimum contribution (in order not to drive myself mad, probably would use minimum payable @ 9/15/2009 plus any possible quarterly interest charges). However, when determining maximum funding, would think that I would need to do another set of iterative calculations solving for max funding, with a different (lower) NEI for 2008 than the resultant NEI for 430. How is everyone interpreting this? If you just plugged in the NEI you developed for minimum funding into your 404 calcs, think you would end up with an "out of balance" NEI calculation.

[JAY21]

I would do it exactly the way you outlined it. I can't see how it can be done any other way. Then to add more fun say they choose something in the middle of the min-max range then we get to do it all again based on the desired contribution amount !

[mwyatt]

Even more "entertaining" is contemplating benefits shown for said individual (if, you contribute the minimum, here is one benefit based on a level of NEI, if you contribute the maximum, here's a lower benefit based on a lower NEI). So will be explaining to perplexed client that if he puts less money into the plan, he has a higher benefit - I can't think of a better reason to move to BOY valuations than this logical (but illogical) result.

[flosfur]

Even more "entertaining" is contemplating benefits shown for said individual (if, you contribute the minimum, here is one benefit based on a level of NEI, if you contribute the maximum, here's a lower benefit based on a lower NEI). So will be explaining to perplexed client that if he puts less money into the plan, he has a higher benefit - I can't think of a better reason to move to BOY valuations than this logical (but illogical) result.

How does the BOY val solve this dilemma?

[tymesup]

If you use BOY, you can use the 2007 earned income to estimate the 2008 earned income. This will in turn lead to minimum required and maximum deductible contributions for 2008. Accountant comes up with Schedule C, client makes 2008 contribution, you calculate 2008 self-employment tax and voila, you have 2008 earned income. Repeat for 2009.

Several flies in this ointment. End of year assets, including contribution, may not match up well with end of year lump sum since 2008 Schedule C not reflected. You can adjust the contribution to reflect this, if you want to do the extra step.

If there are employees and/or another plan and/or non-discrimination testing, you get an extra round of work.

If 2007 earned income is large, you may get a large 2008 minimum. If 2008 Schedule C is small, cash may not be available and/or contribution may not be deductible.

BOY works better if owner already has comp over the a17 limit.