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Additional employer adopting after the year end and deduction issues


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Hi

Looking at a proposal for combo plan DB/DC, owner plus a bunch of employees

DC is in existence for many years and DB will be retro to 2023. No PBGC coverage.

Just found out that, the owner of the company sponsoring the DC plan also has a schedule c (no employees) which has substantial income but not adopted the DC plan as an additional employer so only w-2 is being used as his income. FYI W2 is 150k and schedule c income is 1M

Q1. Can the schedule c retroactively adopt the DC plan as additional employer?

Q2. If schedule c cannot adopt the DC plan retroactively as an additional employer but is included in the new DB plan, what compensation can be used for:

  • Combined testing
  • Combined deduction at 6% DC limit
  • Combined deduction at 31% limit

Thank you

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I'm fairly sure #1 is no.

Not sure about #2. Saw some ASPPA presentations that say compensation from all related employers is used for testing, HCE determination and deduction limits. But IRC 404 says for self-employed compensation is net earned income from the trade or business upon which the plan was established. 

I think the safest way to proceed is establish DB retro to 2023 with both entities adopting, determine DB NARs and MVARs using total eligible compensation from both, determine EBARs using compensation from just the adopting employer, and apply 6% limit using the same. Then have owner adopt DC for SE business in 2024. It is not optimal but still likely substantial opportunity retro for 2023 and better than waiting until 2024.

 

Kenneth M. Prell, CEBS, ERPA

Vice President, BPAS Actuarial & Pension Services

kprell@bpas.com

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