415(e) Test and New Plan

[Guest Keith N]

The 415 limit is a personal limit by employer. As long as your guy owns a certain percentage (I think 50%, but I'm not sure) of the Corp., then for 415 purposes it's the same entity as the Sole Prop. and the service could count. You should be careful with the DB accruals because the 415 $ max (130,000) still requires 10 year PARTICIPATION in the DB plan to get it.

[Guest Brenda Meyer]

I am working on a proposal for a new DB plan. There has been a previous DC plan when the employer was a sole proprietor. The employer is now incorporated. Is it allowable to use past service and compensations attributable to the sole proprietorship in this new DB plan for the corporation, since the DC/DB fraction uses these past compensations in the 415(e) test? I'm assuming I would have to specify in the document that "service (and then compensation) from a predecessor employer" would be counted?

[david rigby]

What if question:

What if the prior employer had been a Sub S, and the individual had taken Sub. S dividends but no comp?

[mwyatt]

In response to Pax's "what if"?

If the entire prior history was as a Sub-S with no compensation, only dividends, then your problem goes away (or maybe an uglier problem rears its head) as there shouldn't have been any prior DC contributions as there was never any eligible compensation paid to the principal. You could use prior service but in all likelihood part limit on 415 $ limit would limit benefit accruals from past service. (Trick question w/ Sub S dividends?)

[david rigby]

Follow-up to mwyatt:

Are you saying that if all prior "employment" was under Sub. S and there was no comp paid, only Sub S dividends, that we could still count the prior "employment" as service for the 415 DC fraction and the 415 phase-in? Or perhaps, because there is no comp, then it does not matter since 25 % of zero is zero.

Come to think of it, maybe it is not relevant for the DC fraction. Does that affect the 415 phase-in?

My question originates in the assumption that, because there was no comp, then there is no "employment relationship". Where is my logic flawed?

Thanks.

[This message has been edited by pax (edited 03-08-99).]

[mwyatt]

I guess that I was focusing on the fact that you had no 415 compensation paid for the individual so that the DC denominator would be a summation of $0. You do raise an interesting point as to whether the past service could be included (for high 3 year calcs I imagine) if the owner was not an "employee" during this time frame as no W-2 wages were paid. Assuming this is an aggressive plan design this might not be as significant as the participation reduction on the dollar limit would most likely override any calculations. I suppose one could argue he was an employee with 0 wages during this time in order to use the past service.