415 Compensation

[JBones]

If an individual has been a sole proprietor for several years, incorporates during 2010 and the new corporation subsequently adopts a defined benefit plan, is the earned income from the sole proprietorship eligible to be used in the determination of 415 high 3 compensation?

[SoCalActuary]

If the plan chooses to do so, it can limit compensation to the adopting employer only, not other members of the controlled group. Further, it can exclude compensation before the effective date of the plan.

These choices also allow the opposite options, to count comp before the effective date, and if so, to count comp of other members of the controlled group. The answer is more complex if the prior business is not a continuation of the same business.

[JBones]

Thanks. It is a one participant plan that had large earned income in the past and will have much smaller wage under the corporation. They want the large deduction, so they want to count the prior comp to get a large benefit. The corp is a continuation of the sole prop business, so it sounds like they can accomplish their goal.

Will the document need to specifically name the sole prop as predecessor employer or does that only affect credited service?

[SoCalActuary]

Thanks. It is a one participant plan that had large earned income in the past and will have much smaller wage under the corporation. They want the large deduction, so they want to count the prior comp to get a large benefit. The corp is a continuation of the sole prop business, so it sounds like they can accomplish their goal.

Will the document need to specifically name the sole prop as predecessor employer or does that only affect credited service?

I would name the predecessor employer in the document. I would also consider granting past service credit for benefit purposes.