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Should ignore actuaries comments and still make a 2012 contribution?


Guest gshane

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I recently received a letter from the actuaries for my DBP not to make a contribution for 2012 since the plan is overfunded. I am wondering if I should ignore their advice and still make a 2012 contribution since I know in the coming years my income will be falling? The actuaries gave a 2012 contribution range of 0 - $343,250 which is a big range, but said it is best not to contribute anything.

I have a DBP which is a qualified plan, that I started at age 40 with a RA of 55. I am presently 48 years old and every year since I started the DBP my compensation has been over $500K allowing me to make the maximum contribution to the DBP . The plan assumes a rate of return for both pre & post retirement at 5%

Current trust assets as of 12/31/2012 were $1,040,000 and exceed the maximum distributable amount as of 12/31/2013 which is $1,025,000. So that means the trust is presently and will be at the end of this year 12/31/2013 overfunded providing the assets don't decrease in value due to market fluctuation. So my question is what is the most I can contribute for 2012 and a strategy to work out the overfunding issue?

My business is setup as a sole proprietor (entire business is just me - no employees) I believe with DBP the overfunding tax penalties is something like 93% (50% Excise Tax, 39.6% Income Tax, 0.9% ObamaCare surtax, and say 3% SE Tax). I don't understand when or how these penalties kick in. When a DBP is overfunded one has several years to allow the trust assets to return to the maximum distributable amount by typically not making a contribution for a year like the actuaries are recommending.

Since 2013 brings many higher federal taxes (35 > 39.6%) plus the new Medicare taxes (0.9% for income above $200K & 3.8% on unearned income) I had accelerated income from my business in 2012. Not making a contribution to my DBP for year 2012 results in me having a much much higher income tax bill for 2012. My business does not have a great deal of expenses since I am in the wholesale business where I just buy and sell and work on the margin. My biggest expense on my Schedule C is the DBP and Solo 401K contribution.

What needs to be factored in for future contributions to my DBP is the direction of my business which is going downhill. My business has done well over the years but I the business slowing down dramatically, almost free falling. I would guess in 2013 the business gross profits would be in the range of $350K - $500K. Then in 2014 gross profits in the $200K range. Again these are gross profits and just guesses and the could be lower. It would be a true miracle if they are higher and extremely doubtful since I want to work a lot less. In 2015 thru 2020 (retirement age for my DBP is 55 which is year 2020) I want to work very little and I could keep the business running even if this means selling items on ebay (whatever it takes to qualify that the business is still in existence). So if I do make a contribution for 2012 to my already overfunded DBP I think I could have several years ahead to adjust for overfunding issues.

Also any contribution to the DBP is limited to my compensation - 1/2 SE Tax so how would this effect the overfunding issue if my compensation from my business is $50K in years 2015-2020?

For 2013 the contribution the actuaries gave me were even broader with $595K and this time a minimum of $100K. I definitely want to make a contribution in 2013 because of the higher taxes. So if this means zero contribution for 2012 I guess I need to do this. I would rather pay taxes in 2012 verses a 93% overfunding tax penalties.

Hopefully people on this forum can reply back with a strategy for me to follow to maximize my contributions for 2012 and 2013 which will be my higher earning years and then in 2014 and beyond a true drop in business income. I really would like to stop operating my business and retire in 2017 but I think with this overfunding I'll need to have the business start open until 2020.

I know about the strategies of Adding Plan Participants, Transfer Assets to Replacement Plan, Increase Plan Benefits and Merger of Plans but none of these will work for me. My strategy if allowable under IRS and ERISA regulations is to make contributions in 2012 thru 2014 and the DBP will be grossly overfunded and then make no contribution from 2016 - 2020 since I'll let the business run part time and will generate very little income, but during this time the trust assets to return to the maximum distributable amount.

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Is this information you have shared with the actuary? You ask for a "strategy", but your actuary is better informed than this Message Board, assuming he/she knows all the facts you've presented here.

... I know in the coming years my income will be falling...

I'm a retirement actuary. Nothing about my comments is intended or should be construed as investment, tax, legal or accounting advice. Occasionally, but not all the time, it might be reasonable to interpret my comments as actuarial or consulting advice.

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Hopefully people on this forum can reply back with a strategy for me to follow to maximize my contributions for 2012 and 2013 which will be my higher earning years and then in 2014

So, your doctor has advised you and you don't like the advice. Understandable. Suggestion is to seek a second opinion but not from a newspaper column.

The material provided and the opinions expressed in this post are for general informational purposes only and should not be used or relied upon as the basis for any action or inaction. You should obtain appropriate tax, legal, or other professional advice.

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Thanks for your reply David and the information above was shared with the actuary and I am waiting for their response. I only posted the quandary I am in to this message board thinking maybe somebody else has been in this situation. I did read several posting on this message board about overfunding issues so I truly don't believe I am out of line posting the question(s) I addressed.

I believe the pension actuarial consulting firm I use is experienced but sometimes issues might be looked at in a year to year picture frame verses 5 - 7 years. I only assume the actuary looks when the the NAV of 12/31/2012 exceed the 12/31/2013 trust assets maximum distributable amount they say don't contribute. Hopefully they will come back with a strategy for my situation.

If I am offending anyone for posting on this message board please accept my apologies. I spent a lot of time outlining the situation and thought I might get some positive feedback and not "Suggestion is to seek a second opinion but not from a newspaper column."

Not to pick on "Andy the Actuary" but when a doctor tells you have a medical issue and they need to operate would it hurt to get a 2nd or 3rd opinion? This forum sure seems like it has many experts regarding DBP and other benefit plans and I can see you are very active with 1,991 posts and I kindly ask you or any member of this message board to provide their input to the questions I outlined.

Like all specialize professions there are okay, average and high experienced actuarial consulting firm and I don't know where the firm I use stands. They were referred to me by a large wealth management firm I use but that doesn't mean they are the most experienced. It's not like there is an actuarial consulting firm rated "AV" by Martindale-Hubbell like there is for lawyers. Lawyers can be inducted into the Trial Lawyer Hall of Fame by the American Trial Lawyers Association if they are spectacular. How what about pension actuarial consulting firm?

Once the actuary consulting firm I hired comes back with a possible strategy I'll post it here to possible help others if David the moderator feels it is okay and may help others.

Thanks for your time reading this posting and I hope someone can answer the question "... how would this effect the overfunding issue if my compensation from my business is $50K in years 2015-2020? "

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If you choose to over fund, that is your decision. The biggest reason to avoid overfunding a pension plan is to avoid the problem of a 50% excise tax on those excess assets. DB's are a little tricky, you can generally put in way more than you need, but you can only take out a limited amount. There is a maximum distributable benefit defined by law, in IRC Section 415. This effectively limits the amount you can take out of the plan.

Ask your actuary how close you are to the 415 limit currently. Also ask him/her to estimate the 415 limit at your anticipated retirement age (55). Also, consider how much your pension investments will grow over the next few years. Then compare those two numbers and decide if you need to put in more money. Worse case, you loose 50% of the excess assets, which would then be subject to corporate income tax and maybe personal tax if you pay it to yourself, so you are probably going to loose around 90% of it.

If that is a risk you are willing to take, go ahead and put the money in the plan.

The material provided and the opinions expressed in this post are for general informational purposes only and should not be used or relied upon as the basis for any action or inaction. You should obtain appropriate tax, legal, or other professional advice.

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Since 2013 brings many higher federal taxes (35 > 39.6%) plus the new Medicare taxes (0.9% for income above $200K & 3.8% on unearned income) I had accelerated income from my business in 2012. Not making a contribution to my DBP for year 2012 results in me having a much much higher income tax bill for 2012.

You contradict your own intentions... you accelerate the income to the lower tax bracket year but then you want to take extra deductions, which you could delay until 2013 to result in a greater tax savings.

Kurt Vonnegut: 'To be is to do'-Socrates 'To do is to be'-Jean-Paul Sartre 'Do be do be do'-Frank Sinatra

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I have rarely seen any pension consulting firm make a contribution recommendation for a sole proprietor without looking at the implications of 415 limitations and overfunding issues in the future years. Yes, I would ask for 2nd and even 3rd opinions, of course I would also expect you to pay another consultant for those opinions. People on this board are extremely helpful when it comes to issues that should be considered and what you should ask your pension consulatant so that you can have all of the facts.

As the facts stand, your plan is overfunded on a cash basis. You may already be running into a 415 limit issue. Provide your actuary with an estimate of your future income and ask them to prepare an expected contribution stream through 2020. Talk with them about how they expect to project the Interest Rate assumptions (since we don't even know 2013 rates yet). Ask them to show you a range of expectations and work with them from there.

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This is a common situation with clients that we deal with but the level of detail needed to really make a judgement is far beyond just future income. How many years of service do you have? How aggressive is your investment strategy? How likely is your business to remain open during these lean years? Do you have employees? Do you have an adjacent profit sharing plan? We would love to have a simple 'yes' or 'no' for you but unfortunately there are a lot of factors used to make this decision.

I completely agree with David on his opinion. Your actuary should be able to give you a good answer. More specifically, he or she should arm you with the possible outcomes so you can make an informed decision. As Effen stated, this is up to you. If spit hits the fan, you're ultimately on the line.

On an unrelated note, I am a huge fan of the 'like' button that was added recently to this fantastic forum.

IMHO

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