Defined contribution rules


A

aristotle

I was told the government requires a minimum 5 year
commitment to a defined contribution plan. My income will
be substantial for the next few years and I want to
establish a plan but are unsure of about five years. Could
someone clarify this point.
 
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G

Gene E. Utterback, EA

aristotle said:
I was told the government requires a minimum 5 year
commitment to a defined contribution plan. My income will
be substantial for the next few years and I want to
establish a plan but are unsure of about five years. Could
someone clarify this point.
In 21 plus years as a tax professional I have never heard of
any such requirement. I would suggest you make an
appointment to meet with an advisor who can give you good
accurate advice.

Gene E. Utterback, EA
 
P

Paul

aristotle said:
I was told the government requires a minimum 5 year
commitment to a defined contribution plan.
No. The Plan may have a 5 year vesting schedule, as allowed
by law, but shorter vesting schedules are also allowed. I
don't think anything greater than 5 years is permitted.
My income will be substantial for the next few years
and I want to establish a plan but are unsure of about
five years. Could someone clarify this point.
A defined contribution plan is generally established by the
employer. If you are an employee, you can't set your own
plan up. See your employer and get them to set it up.

If you own the company, then go see a financial planner.
There are several other options that may interest you.
 
M

MTW

aristotle said:
I was told the government requires a minimum 5 year
commitment to a defined contribution plan.
I believe that restriction (and I'm not sure how binding it
is) actually applies to defined BENEFIT plans (not defined
contribution plans).

MTW
 
B

Brian

aristotle said:
I was told the government requires a minimum 5 year
commitment to a defined contribution plan. My income will
be substantial for the next few years and I want to
establish a plan but are unsure of about five years.
Treasury Regulations §1.401-1(b)(2) provides "The term
"plan" implies a permanent as distinguished from a temporary
program. Thus, although the employer may reserve the right
to change or terminate the plan, and to discontinue
contributions thereunder, the abandonment of the plan for
any reason other than business necessity within a few years
after it has taken effect will be evidence that the plan
from its inception was not a bona fide program for the
exclusive benefit of employees in general."

While there is no hard and fast five-year rule, I have seen
5 years touted as a rule of thumb for being adequate to meet
the permanent plan requirement.

Those regs go on to provide:
""it is not necessary that the employer contribute every
year or that he contribute the same amount or contribute in
accordance with the same ratio every year. However, merely
making a single or occasional contribution out of profits
for employees does not establish a plan of profit-sharing.
To be a profit-sharing plan, there must be recurring and
substantial contributions out of profits for the employees.
In the event a plan is abandoned, the employer should
promptly notify the district director, stating the
circumstances which led to the discontinuance of the plan."

Hope this helps.

Brian Bivona
 
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E

Ed Zollars, CPA

In 21 plus years as a tax professional I have never heard of
any such requirement. I would suggest you make an
appointment to meet with an advisor who can give you good
accurate advice.
As Brian noted, the issue is the permanence requirement for
plan qualification under the IRC, and the regulations on
that subject. The "five year rule" isn't in the regulations,
but it is often used as a rule of thumb for what would be a
"safe" period for the plan to be in existence prior to
termination. That is, the IRS would rarely question the
issue on a plan in existence seven years, but could very
well question a "one year only" plan.
 
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