Can Service and Compensation from prior Entity be used?

[Dougsbpc]

Suppose you have an attorney (lets call him Steve) who was a 90% owner in a law firm from 2010 through 2020. The firm dissolves in late 2020 and Steve forms a new law firm as a 50% partner with another attorney on 1/1/2022. They will not have any employees.

Question: If they start a defined benefit plan effective for 2022 could Steve's compensation and service from the prior law firm be counted in the new company defined benefit plan?

Same question except suppose Steve was only a 10% partner in the prior law firm?

Thanks.

 

[Lou S.]

Granting service for eligibility and vesting for service with another entity would not be a problem, subject to nondiscrimination but since there are no NHCEs you'd be fine from that standpoint.

But unless you have a controlled group or affiliated service group I think using the compensation from the prior entity is problematic under the exclusive benefit rule and also don't believe you would be able to use it for establishing a 3 year high salary for 415 limits.

Someone else might have a more aggressive position. If so I'd be curious to see what citations would be used to support it.

 

 

[CuseFan]

Agree with Lou - your 415 clock and comp reset.

[Nate S]

On 12/6/2022 at 4:51 PM, Dougsbpc said:

Question: If they start a defined benefit plan effective for 2022 could Steve's compensation and service from the prior law firm be counted in the new company defined benefit plan?

What does the intended Plan Doc say you can do?  Likely the formula can use the prior service, but as noted not your limits.  "Steve" likely still has to work 10 years, and have three decent years compensation-wise.

And, if the new firm is a partnership, set the plan as a beginning of the year valuation; that way compensation becomes an assumption and your valuation is not in a circular calculation with the actual compensation and final contribution amounts.