My wife and I are thinking about switching to a DB plan. With our ages

[Guest sampat]

Bill,

I did not get the idea of "skewing" the plan towards the "family"? How does it work? I currently only have three employees (me, my wife and a temporary non-resident VISA worker).

Sampat

[Bill Berke]

It is most likely (95%) that with one of you earning salary, you would get a much greater proportion of the total contribution especially if you use an integrated, cross-tested or age-weighted formula. I cannot tell you which formula would be best for you, that would have to be calculated by your TPA. Also, I wonder why your CPA did not bring up paying only one of you to minimize payroll taxes.

From the facts, your employee is a participant (assuming he/she meets the eligibility requirements). With a vesting schedule, you should recoup most of your contribution for the employee if the he/she leaves your employ soon. If you are just starting a new plan, I recommend that you start vesting from the effective date of the plan so that your employee has to be employed at least 1 1/2 years from the plan's effective date before accruing any vested benefits. This option is not allowed in some prototype plans so if you want this option check the document - which you should read in detail in all cases. Vendors are trying to sell you something; you are responsible for the final document that you sign - caveat emptor. I do agree with your conclusion to stick with a DC plan for now (3-5 years).

[RCK]

I haven't dealt with a plan this small for years. But my recollection is that on audit there would be a reasonable compensation issue if both people work but only one gets paid.

[Bill Berke]

RCK All the unreasonable comp issues I have seen revolve around too much compensation (and I have not seen any lately). This is an S-corp and I have never seen an unreasonable comp case for an S-corp (there are no dividends for the IRS to impute and separately tax). Moreover we are talking about apprx $120,000 which in today's world is not unreasonable for a CEO to earn. If the spouse voluntarily works at the office, this is between the family members. And if I'm missing something, please let me know, I haven't stopped learning. In fact the older I get the less I know.

[richard]

To Andy H. No, the boxer wasn't George Foreman. It was some middleweight about 20 years ago. (Far be it for me to err on Mr. Foreman --- he's bigger than I am!)

To Sampat and the other readers --- this thread illustrates how complicated some situations can be, and how it pays to look into a lot of the what if's.

To Sampat -- how old is your employee? When was he hired? How many hours per year does he work? And how much does he earn over the year? This information is crucial in determining some of your alternatives?

[Guest sampat]

Richard,

The employee is 29 years old on non-resident H-1B visa. He works full-time and has been working for last 1.5 years. His current salary is $55000/year.

Thanks.

Sampat

[Guest Matt Tuttle]

I am late to this discussion but a couple of thoughts: If you are worried about a 5% interest rate being aggressive look at a 412i DB plan, it uses the guaranteed rates of the investments as the assumptions, currently around 4.5% paying 5.25%. If you were going to be conservative on the investments anyway this might work. Also, if you want to keep your DC plan and want to be aggressive consider a VEBA as long as it is actuarially sound and the contribution is reasonable you can deduct whatever you want from yr to yr. There is a lot of controversy about this concept but I don't think it is as aggressive as playing games with a DB plan.

Matt Tuttle