New Plan - Existing S-Corp that has "not been used in the past"

[JBones]

A potential client has an existing S-Corp that they claim they set up about 2 years ago, but have never run any business through and have never taken wages through. This year the S-Corp has commenced business operations and they Owner and wife are taking wages.

Let's assume the S-Corp commenced 1-1-10 and the wages for 2011 will be $100,000. For 415 % of pay limit, should the 415 % of pay limit be:

a) 2*10%*($0+$0+$100,000) = $6;667 or

b) 1*10%*($100,000) = $10,000

The plan won't be recognizing any past service. I would think that the previous years of the S-Corp in which there were no wages would not be included in the determination of the high 3 average pay because there was no service.

[SoCalActuary]

Why the second zero in formula a? You have two years, so the average is $50,000 annually and the benefit is 20% x $50,000.

[JBones]

Why the second zero in formula a? You have two years, so the average is $50,000 annually and the benefit is 20% x $50,000.

Thanks for the reply. Sorry about the second zero, initially I wrote the example using 3 years rather than 2, but then formula a) and b) came to the same answer - when I made the change, I forgot to delete one of the zero's.

[ScottR]

I think it depends on how the plan defines a Year of Service. If it's a PY w 1000 HOS, then the pre-2011 service probably wouldn't count (and comps for those years would be ignored in the high 3 avg). But if elapsed time or equivalencies are used, then it could be a different story.

As was pointed out, no immediate impact. But it will have impact down the road, when we're clear of the 3-year averaging period.

... Scott