Sole proprietor DB plan + 401kPSP

[VeryOldMan]

 DB Plan adopted for lawyer back in 2010 and used prior service to establish high3 EI comp, which is $175,000. 

Current yr is 2020, EI  after "salary"of $80,000 and before pension=$200,000. 

2020 DB MRC is $225,000.  The company contributes 200,000 by due date for 2020 tax year  ( 4-14-21) and $25,000 after 4-15-2021.

Company will deduct $200,000 for 2020 and $25,000 for 2021 under 404(a)(8), with the total $225,000 contribution reported on 2020 SB. ( covered at '16 EA meeting.)

This will reduce the 2020 taxable Earned Income ( after pension deduction) for 2020 to zero.

Nevertheless CPA recommended client to also make a 25% profit sharing contribution for 2020 based on the estimated EI of $200,000 and pay and deduct it for 2021.

Questions:

The MRC is based on the original high 3 EI per the plan doc and unrelated to 2020 EI, at least as far as pension contribution is concerned.  But how does this impact the current EI for DC benefit computations? Wouldn't the EI be zero and therefore no DC contribution possible?

 

Appreciate any feedback. TY

 

 

 

 

[Lou S.]

If his earned income is $0 for 2020 his 415(c) limit for 2020 is also $0.

Also assuming a combined plan limit where he can deduct 6% of his pay a DC contribution (since the minimum required contribution is more than 25% of pay), 6% of $0 still equals $0.

[Mike Preston]

What is this $80,000 salary of which you speak?

[VeryOldMan]

$80,000 was salary he paid to his wife in 2020.

I am not sure about 2020 but I also have a related question that I forgot to ask.  

The way I read the law, for 2021, the $25,000 deduction taken is from plan year 2020 and thereby would not impact the determination of a DC contribution for 2021, e.g., the 2021 EI before contributions would not be affected by the $25,000 amount. Do you agree? TY

[Lou S.]

Is this a PBGC Plan? If not don't you have combined DB/DC deduction issues?

Are the husband and wife the only 2 participants?

Is the wife's W-2 compensation $80K and husband Earned Income compensation $0?

Would an additional DC contribution drive his earned income below $0? And if so wouldn't that just shift more of the $225,000 DB contribution from 2020 to 2021?

[VeryOldMan]

Lou, 

 

It is not a PBGC case. Employer is a sole proprietor and employs his wife as well. A Form 5500ez case. I am not disputing that 404(a)(7) applies here for the DB/DC combo. My question is more with regard to what is the applicable Earned Income to compute the pension expense, in a case that is using RR 77-82 for the allocation of the prior year deduction. If a db or dc deduction is taken for a given tax year  that relates back to a prior plan year's operations, how should that affect the earned income for pension purposes for the current year? 404(a)(8) says the deduction is taken in the tax year in which it is funded, even if that occurs in a subsequent year.

More directly, please suppose that for year 1 and year 2 the gross Earned Income was the same, e.g. gross income less operating expenses less wages but before pension expense. In year 1 the DB contribution is $X but it is contributed and deducted in year2 as provided in RR 77-82, shouldn't that deduction of $X not be applied to reduce the Earned Income for pension computations in year 2?

Your comments are much appreciated.

TY

Phil

[VeryOldMan]

After further review, I now agree with your assessment. TY