Loan to make contribution

[retbenser]

Given: PLLC -- DB Plan with employees.

There is not enough corpoarte income to make the minimum contribution.

Owner/ shareholder want to terminate the plan.

Question: can the owner make a personal loan to the PLLC to make the minimum contribution?

(Once the asset is distributed, the owner will then get back his loan).

Is there any problem here?

Thanks.

[Andy the Actuary]

The owner could make a loan to the PLLC for any reason. It would seem, however, the PLLC would still be obligated to repay the loan even though the owner received it back in the form of a qualified pension distribution. This seems more of an accounting than a pension issue.

[SoCalActuary]

The owner can certainly add more capital to their business, and can make loans to cover business cash flow.

Getting the money back from the business could be a return of principal, repayment of a loan, or sale of ownership shares.

But getting a tax deduction for that pension contribution is important. So it matters if, when or how the business can get a tax benefit from that payment. For example, it might come in the form of reduction in accumulated profits (equity) that would otherwise be taxed.

Or, it might come as a loss of value on an active interest in the business (so the passive loss rules don't get in the way).

Or, it might create a loss position that can be offset against future income.

But I would not recommend that it come from a closing business that does not have any tax benefit to the owners. In that situation, you would be converting after-tax equity into pre-tax pension income.

Another alternative is to change the plan to require employee contributions, subject to the 401(m) test. Then the owner could make required contributions that create a tax basis for any distributions.