BY KEVIN DONOVAN AND LYNN M. YOUNG
As seen in the Summer 2014 issue of Plan Consultant Magazine
Many problems in solo owner-participant defined benefit plans can be avoided by knowing what your client’s funding objectives and projected cash flow are before you design the plan.
When a solo practitioner is looking for a way to defer taxes, often his or her advisor will recommend adopting a defined benefit plan. This can result insignificant tax savings to the individual. However, if the design of the plan is flawed, it can create headaches for the advisor, the actuary and the owner as the plan matures. Even with a solid design at the onset, issues can still arise from a variety of areas. In this article we will identify four areas where we have seen issues that can lead to problems down the road:
- data issues;
- plan assets;
- deduction issues; and
- plan termination.
DEFINED BENEFIT PLAN DATA ISSUES — IS THE COMPENSATION REPORTED CORRECT?
One of the keys to minimizing issues in a single-participant defined benefit plan is making sure the data you receive is accurate, not only when administering the plan on an annual basis,
but also in the initial design of the plan. Many firms have gone to a web-based data collection process. While this may offer significant time savings, there is room for error depending on
the knowledge of the individual entering the data. The entity type of the business determines how compensation is reported, as outlined in the following table.