415 Limit Service

[Dougsbpc]

A small corporation (just a business owner) started a business 5 years ago. Worked very hard all of those years and now the company is profitable enough to sponsor a defined benefit plan. In 2023 his W-2 salary was $300,000. In all previous years of the company he did not take a salary. As it turns out, 2023 was the first year that revenue exceeded expenses. He is currently age 71.

According to the business owner, he has always worked more than 1,000 hours and in years 1-4 he believes he worked more than 3,000 hours per year.

My question is with the 415 limit calculation.

Our understanding is that for 415 purposes, his 415 limit is the lesser of the following:

1. The dollar limit:   $265,000 / 12 months = $22,083.33 X 1 /10 = $2,208.33 but in this case increased to $4,866.13 because of age 76 retirement.

2. Service limit: $330,000 /12 months = $27,500.00 X 10% per year of service. $27,500 X 10% X 5 years of service = $13,750.

So his first year accrued benefit will be limited to $4,866.13.

My question is this: even though he did not draw salary for years 1-4, are we able to count those years in our service part of the calculation (#2 above)?

Thanks!

[david rigby]

Is there a plan?  What effective date?

[Dougsbpc]

Just to clarify

This plan has not been adopted yet. If it makes sense, they want to adopt by next week effective for the plan year 1/1/2023 - 12/31/2023.

[Lou S.]

I'm not sure the IRS has opined directly in written guidance on the issue, if they have and I've missed it and I would love a citation. I believe this has come up in other topics on benefits link, often in conjunction with an unpaid working spouse who they now want to give a benefit to based on prior unpaid service or enter the plan under year of service saying the DOH was really when they started having unpaid service.

So I think you are in a gray area where some will say "yes" the 415 service should count and others who will say "no" it should not count.

 

[C. B. Zeller]

You said it is W-2 comp which implies this is a corporation. I'm going to assume S-corp, since that's more common for small businesses. I'm also assuming you (and your client) are aware of the issues with reasonable compensation for S-corp shareholder employees. If there was no passthrough income from the corp to the shareholder in those years then it's probably not an issue.

Just to clarify, what was his comp for 2023? You wrote $300,000 in the first paragraph but used $330,000 for your calculation. I'll assume that $330,000 is correct and that $300,000 was a typo.

Under the circumstances, I would have no problem including the pre-2023 years of service for 415. However I would include them for 415 comp as well. The comp limit is the high 3-year average comp prorated for less than 10 years of service. So his comp limit at 12/31/2023 is (0 + 0 + 330,000) / 36 months = 9,167 * .5 = 4,583.

[CuseFan]

Agree w/CBZ 100%