Takeover and deduction related

Hi

Looking at a possible takeover plan which I think there may be an issue with deduction. I think I know the answer (sorry, a bit fried brain today) but want to see if anyone has a fresh look and comment. My apologies for a rather long explanation. If I am not clear in any of the points, please let me know.

Not sure if a CG or ASG or if any at all but for arguments sake let's say either CG or ASG (still waiting on info).

Looking at 2023. this is a DB plan.

Prior TPA valuation report shows 300k as salary for pension purposes. Deduction was 200k.

Company A (a partnership) sponsors the plan. The majority partner's se income in box 14A shows 300k. There is also 500k under box 14C - non-farm income (which cannot be used for pension, if I recall correctly). Assume the other partner is silent and has no box 14A income. 

If this was the only company sponsoring the plan with ASG/CG, even the though the deduction is within 300k se income limits under box 14A, the salary is definitely not as they would need 14A to be over 500k+ (excluding the 1/2 se tax adjustment), as per prior TPA report.

Now, Company B (a sole proprietorship), which is part of CG/ASG as assumed above and owned by the majority partner 100%. Line 31 of the schedule c shows 300k (but not adopted the plan).

If I recall correctly, for 415 limit purposes, you add both entities, please correct me on this.

However, for pension/deduction purposes, one cannot add both incomes for valuation purposes, only Company A can be used, please correct me on this as well.

Let's assume that it was intended that both companies to adopt the plan, say, going back to 2019, inception year (I have a feeling the plan operated similar to 2023 in prior years, afraid to ask/check but must).

Can this be corrected without VFCP i.e. is there a self-correction on this or must file with the IRS for correction? Any other comments/suggestions?

Thank you for your time.

Is it beginning of the year valuation?

You don't say if the benefit driving the deduction was based on a percentage of current compensation. Historical earnings could have established a sufficient hi-3 415 FAE to substantiate a large benefit and resulting deduction which is then only limited to net adjusted SE earned income. We have lots of owner-only plans where current deductions based on historical average 415 comp drive net adjusted SE earned income to (near) zero.

If the benefit or contribution credit is defined by a percentage of current compensation and $300,000 was used incorrectly for that purpose, that's a different story and benefits, valuation, etc. are not correct. If that is the case, I'd run corrected numbers and see if the $300,000 still works within revised Min/Max and there's no AFTAP issue. 

Unless other company is party to the plan, that income doesn't count for plan purposes - yes, can count for 415 purposes. However, if ASG or if CG filing separate tax returns, deductions are company-specific.

Hi

Your second and third paragraphs confirm my understanding. The first paragraph is a different story which is not applicable to this mess but thank you.

It is an EOY val.

Any comments on?

"Let's assume that it was intended that both companies to adopt the plan, say, going back to 2019, inception year (I have a feeling the plan operated similar to 2023 in prior years, afraid to ask/check but must).

Can this be corrected without VFCP i.e. is there a self-correction on this or must file with the IRS for correction? Any other comments/suggestions?"

For the EOY val you need to use actual net earnings, so if benefits are defined as a percentage of current compensation, someone would need to correct it.

Just some suggestions:

1. Confirm how benefits are defined and go from there. For a DB plan it may be a percentage of an average compensation. For a CB plan it may be an amount specified in the plan document without referring to any compensation.

2. Ask prior actuary if it was assumed that both companies adopted the plan or ask him to justify compensations used for calculations.

3. See if you can get copies of all Schedule SBs and copies of tax forms to compare earnings and deductions. 

Or just tell this prospect to find another TPA, since you are not interested in this case