Tips for plan design

[Guest JBY]

I'm trying to design a defined benefit plan for two participants age 29 and 32 with a compensation of $35,000 each. They already have a profit sharing plan with a 401(k) and are justing looking for an additional contribution of around 6,000 each. Looking for suggestions

thanks

[SoCalActuary]

Something like:

"Cash Balance: Hypothetical Contribution is $6,000" ??

Maybe this is too simple.

[Andy the Actuary]

Don't!

Are your fees (and possibly current and future legal fees) plus potential IRS audit exposure justified by such a small tax deduction? Then, you will be dealing with next year when they want to cut their contribution to $3,000 and the following year when they want to freeze their plan. IMHO, you're looking for trouble. No doubt others will say ignore my comments.

DB plans are best suited for high, stable wage earners who want to maximize contributions. They won't even notice the expense when they're deducting 200+K.

[AndyH]

JBY, they are looking for $6,000 plus what from the PS/K plan? Are they owner/employees? How much are they willing to commit to each year for the next five years? I agree that for $6K it ain't worth it, but there may be other issues that this information might highlight.

[ScottR]

JBY,

With the existing 401k plan, each owner can do a $16,500 deferral and get a PS contrib of 25% of $35k = $8750. Right?

If you add a DBP, the PS contribution would have to drop to 6% of $35k = $2100. So the DBP would have to generate an annual contrib of about $12,650 per owner to get the desired overall result.

I think this would be feasible with a benefit formula of 10% of AMC per year of participation. NRA 62, with fully subsidized early retirement benefit (i.e. no early retirement reduction) at 55.

.. Scott

[SoCalActuary]

JBY,

With the existing 401k plan, each owner can do a $16,500 deferral and get a PS contrib of 25% of $35k = $8750. Right?

If you add a DBP, the PS contribution would have to drop to 6% of $35k = $2100. So the DBP would have to generate an annual contrib of about $12,650 per owner to get the desired overall result.

I think this would be feasible with a benefit formula of 10% of AMC per year of participation. NRA 62, with fully subsidized early retirement benefit (i.e. no early retirement reduction) at 55.

.. Scott

I do not know if the PBGC covers this plan. But the answer would change your analysis. To the OP, what is PBGC's role?

[mwyatt]

Unless you can find a "Greanpeace" actuary, would think tax savings on $6,000 contributions would be obliterated by expenses. Plus how much tax savings do you realistically net with incomes of $35k?

[AndyH]

Unless you can find a "Greanpeace" actuary, would think tax savings on $6,000 contributions would be obliterated by expenses. Plus how much tax savings do you realistically net with incomes of $35k?

Before or after Health Care Reform passes and the bills for Stimuli come due?

[mwyatt]

Well Andy, I'll take the administration at their "word" and think that things will be free and clear on $35k (funny though, I've yet to see anyone commenting on the fact that both the House and Senate bills are introducing a cap of $2,500 on Flexible Spending Accounts, other than some NYT apologists commenting on how they are so confusing and who would want to bother filing all of those receipts - guess they haven't quite figured out the total tax savings for folks when you're exempt from Fed, State, and SS).

At some point in time after this bill passes, someone is going to figure out the fine print, and it ain't going to be pretty.