Defined Benefit Plan

[Golden Rocket]

Corp president is a member of the 401k plan he provides for his employees. He contributes the limit every year, and every year he is deemed to be top-heavy. He gets a check back from the trustee, as well as 1099-R. He's not very happy with the arrangement.

I heard that he could set up a "Defined Benefit" plan without restrictions on the amount he could put into the plan. (A 401k is a "Defined contribution" plan) He could, for example, set a target of $1,000,000. Then he could pay an actuary $1000 or thereabouts, and if the formula came up with a current year contribution of $100,000, he could do this without worry about restrictions and "top-heaviness." Depending on changes in rates of return, this calculation (and the actuarial cost) would have to performed every year.

Anyone out there have "hands on" experience with this?

[BOB W]

Corp president is a member of the 401k plan he provides for his employees. He contributes the limit every year, and every year he is deemed to be top-heavy. He gets a check back from the trustee, as well as 1099-R. He's not very happy with the arrangement.

I heard that he could set up a "Defined Benefit" plan without restrictions on the amount he could put into the plan. (A 401k is a "Defined contribution" plan) He could, for example, set a target of $1,000,000. Then he could pay an actuary $1000 or thereabouts, and if the formula came up with a current year contribution of $100,000, he could do this without worry about restrictions and "top-heaviness." Depending on changes in rates of return, this calculation (and the actuarial cost) would have to performed every year.

Anyone out there have "hands on" experience with this?

Yes, but all eligible employees must be included. A defined benefit plan is based on ages of employees. If your employees are up there in age the contribution could be very large.

Setting up a plan usually costs about $3,000 with a future cost of $1,500 + per year. That does not include required amendments as the plan tax law changes.

Right now the employer is kicking in a percentage of the 401k for the employee and the employee is putting in the majority. With a Defined Benefit Plan the Employer will be putting in 100% of the contribution.

Usually at age 50 and up usually 100% compensation can get contributed up to a maximum salary of ( it changes annually) approx 200,000>no sure what the number is for 2008.

[sea-tax]

Why not set up a simple plan. I realize not able to contribute as much as a 401k , but there are no top heavey rules. This would allow him to put away more than he is now.

You might also look at a non-qualified defined benifit plan.

[BOB W]

Why not set up a simple plan. I realize not able to contribute as much as a 401k , but there are no top heavey rules. This would allow him to put away more than he is now.

You might also look at a non-qualified defined benifit plan.

What is nice about a Simple is no administration fees. With the right income and over 50 a key employee can get $11,000 contribution Plus employer's 3%

[JoshinNC]

Defined benefit plans are good for certain clients

The best prospect is a 45-55 year old with employees in the 20-30 year old range. The company has to be able to commit to at least 5 years of contributions, so income should be pretty steady.

A third party administrator is required, leading to the overhead fees. It can be a good plan in certain circumstances.

[New York Enrolled Agent]

Rocket

You wrote: "I heard that he could set up a "Defined Benefit" plan without restrictions on the amount he could put into the plan. (A 401k is a "Defined contribution" plan) He could, for example, set a target of $1,000,000. Then he could pay an actuary $1000 or thereabouts, and if the formula came up with a current year contribution of $100,000, he could do this without worry about restrictions and "top-heaviness." Depending on changes in rates of return, this calculation (and the actuarial cost) would have to performed every year."

I do believe there are limitations on the annual benefit under a defined benefit plan. For 2007, the annual benefit was capped at $180,000. See Notice 2006-98 which gave the indexed amount for 2007 and §415(b) for the general (as always, there are exceptions & special cases) limitations on a d.b. plan.