One Person DB Plan Failed to Make MRC

[emmetttrudy]

A one person DB Plan has about $100k in contributions from 2009 that was not made. Form 5330 was filed, excise tax paid and now the amount is growing because the contributions still has yet to be made. Client is considering plan termination to stop the bleeding. If she were to terminate the plan would the 2009 contribution still be required or would she just be paid out to the extent the plan is funded? There is a small MRC allocable to 2010 as well, even though the plan was frozen in 2010. My inclination is that these liabilities have been incurred and need to be funded, even though it would seem somewhat impractical given it is a one person plan, no employees.

[Andy the Actuary]

If not incorporated and over 59 1/2 (so that 10% distribution penalty doesn't apply), consider tax implications of borrowing money, making contribution, terminating plan, taking distribution, repaying loan.

[emmetttrudy]

Thought if that, but she is only 56 so the 10% penalty would hurt if she were to take the cash distribution to repay the loan.

[Andy the Actuary]

Okay, then she takes the distribution and rolls it to an IRA. Then, rather than repaying the loan all at once, she takes a fixed loan with a balloon and takes systematic period distributions from the IRA to repay the loan. I believe she would have to take these distributions for 5 years and then could take a lump sum to repay the balloon.

[SoCalActuary]

If the client does not need the tax deduction, then why convert after-tax money into taxable money with no tax benefit.

Get the plan terminated and paid out during 2011, so you only have excise for the 2009 and 2010 year minimums, plus a partial 2011 year.

On the other hand, if the person is only age 56, they probably need to continue working and saving for retirement.

Keeping the plan in place, with an affordable benefit formula, would still be the smart way to build their retirement fund.

The big key: find the money to correct the underfunding, but do the tax consulting to schedule the contributions correctly.