New Plan for a 72 Years old self-employed - Max Contr. & RMD

[AdKu]

To All Pension Professionals and Actuaries,

A potential 71 years old self-employed client with current year income over 1 million and anticipated future years income under 200, 000.

1- RMD - Reg. 1.401(a)(9)-6 RMD for DB Plans and annuity contract Q-6, Q-5 & Q-1, is not very clear as it refers back

Is there any additional guidance how to deal with RMD for the un-vested portion of the account balance when it comes 100% vested in 3 years when the potential client turns age 74?

2- Max. Contribution

what does the initial plan year Max. contribution for Funding purposes looks like?

Many thanks to All PPA

AD

[Effen]

Since you are in the defined benefit board, I assume this is a DB plan?

Will it be a traditional plan or a cash balance plan?

Regarding your questions:

1) There is no "RMD for the un-vested portion". Assuming it is a traditional DB, you would just pay the Accrued Benefit in accordance with the MRDs once he becomes vested. Non-vested benefits are not subject to MRDs.

2) It looks like a number. Probably with 6 digits to the left of the decimal.

[david rigby]

BTW,
the reference to "...100% vested in 3 years..." implies a cash balance design. Is that correct?

Any other participants?

Is the sponsor trying to postpone the RMD as long as possible?

[AdKu]

Clarification

The plan in discussion will be a single self-employed person tradition DB plan with no employees.

The sponsor is trying to postpone the RMD to reduce tax liabilities due to the high level of income in current year.

For the vesting schedule will be 5 years cliff in order to postpone the RMD to later age with lower income.

If I remember correctly, sometime ago I read on this forum that there will not be RMD for zero percent vested owner participant over age 70.5. However, when the participant become vested, he/she will begin RMD for that year plus a make-up RMD for prior plan years up to the extent of the vested account balance.

[Effen]

You can't use 5-yr cliff because the plan will be top heavy. The best you can do is 3-yr cliff. Also, make sure to only include years after the effective date of the plan.

Since it is a traditional DB, he will need to start his RMDs once he becomes vested. Therefore, you will need to commence payments of his accrued benefit in his 4th year. Depending on how you count vesting credit, he could be vested mid-way through year 3, but I think he still wouldn't start RMDs until year 4, but I would need to double check.

The "make-up" RMD is a DC thing, or if he is paid a lump sum. It generally doesn't apply to traditional DB plans until the of plan termination, assuming he takes a lump sum at that time.

[AdKu]

Thanks!

I did not know a single person plan with no employees was subjected to the top heavy schedule.

I would appreciate if someone can help with the actuarial increase and maximum contribution calculations so that I don't play foul providing over the allowable maximum deductible contribution.

[Effen]

You will eventually need to hire an actuary to determine the actual minimum and maximum contributions. This is probably a good time to get that person involved.

[AndyH]

At the risk of stating the obvious, If NRD and vesting service are not written carefully, the person could be 100% vested immediately on day 1.

[tymesup]

2-20 vesting may be better overall than 3 year cliff here. It's worse in year 2, but better for years 3-5.