Benefit Accrual Question

[Earl]

• Corporate DB client has established a high 3 year comp average over $265,000
• Has funded plan above value of benefits so having ongoing years of participation is key to use up overfunding
• Year 4 client wants to know if can take $0 compensation and put profit ($250,000) into plan

Question:

• If plan uses “elapsed time” for eligibility and benefit accruals (not hours) can the participant with $0 compensation still be credited with a year of participation for benefit accruals even though has $0 W-2 compensation..

Thank you for any thoughts.

[dan.jock]

If benefit is based on comp before this year, then there is a benefit accrual. So even with $0 comp, there is a year of participation so long as the person worked the hours. Just because he didn't earn a dollar, it doesn't mean he didn't earn a year of service. Some gov't plans give service benefits to volunteers.

[SoCalActuary]

Why chance it? Pay minimum wage for 1,000 hours.

[Earl]

Which means you think there is a potential problem?

Owner obviously worked, there was $250,000 of profit and she is only employee of corp.

Thanks very much for your thoughts.

[Calavera]

I agree that even with $0 compensation owner should be credited with year of service and participation. But I would not recommend $0 compensation. Since plan is overfunded, you will not be able to make a statement that owner needed to make this contribution in lieu of taking a reasonable salary as owner should. So I suggest:

Step 1: Account for all deductions, and minimum required contributions to a DB plan.

Step 2: Take a reasonable salary (consult accountant).

Step 3: Contribute the rest.

Additional option could be to open solo 401k plan and defer a portion of the salary.

[Earl]

Thanks. I recommended salary of $53,000 to maximize the PS/401k contribution (with VECs)

I appreciate the responses and ideas.

[John Feldt ERPA CPC QPA]

The question sounds like something the CPA or other compensation/tax advisor should answer. If the idea is to avoid FICA, you'll find quite a few cases where the IRS won in court over unreasonably low compensation when large corporate dividends were paid to owners. Consider whether or not the compensation paid, coupled with the actual work being performed and the company dividend being paid - all in concert - will the IRS see this as reasonable, or as some type of tax avoidance?