I've been asked to do a DB illustration for a new LLC, formed in 2008 and taxed as an S Corporation. The LLC is owned 100% by Mr. W. The accountant wants a small W-2 for Mr. W, and a large ($200k+) pension deduction. Mr. W will be the sole employee/participant, and he's 68 years old.

Complications arise because Mr. W and his wife formerly owned a law firm. Each owned 50% of that entity, but they sold out to other (unrelated) owners several years ago. The law firm used to maintain a DB plan, and Mr. W and his wife each received lump sum distributions of about $600k when the plan terminated several years ago. The lump sums that they received were nowhere near the 415 lump sum limits at that time, although it should be noted that the plan had been very underfunded and the lump sums that they received were only about 1/2 of their accrued benefits.

The law firm is still in existence, owned by unrelated parties, and there is no desire on anyone's part that it should become a co-sponsor of the LLC's new plan.

How should the 415 limits be calculated for the new plan?

1. Take into account salary history, years of service, and years of participation at both the LLC and the law firm (since they had common ownership), and offset by the actuarial equivalent of the prior lump sum payouts?

2. Ignore the prior service and comp, and the prior payouts, and treat the LLC as a brand new employer?

3. Other?

Option 1 makes some logical sense, since Mr. W owns 100% of the LLC and (by attribution) used to own 100% of the law firm. It would seem that aggregation might not only be permitted, but required, since Mr. W received a benefit from the old DB plan.

My concern is that it's going to result in a very large initial 415 limit because (a) the lump sum payout was relatively low, (b) Mr. W had 10+ years of participation in the law firm's DB plan, and (c) Mr. W had very high salaries at the law firm. This would open the way for Mr. W to take a very low (or zero) salary from the LLC, while making a huge pension contribution. Seems pretty aggressive to me, especially since the law firm is not going to co-sponsor the new plan.

What d'ya think?

TIA.

Option 1 doesn't smell right, but I can't poke a hole in it.

Agreed that the LLC and the law firm form a brother/sister by attribution of the wife's ownership.

415(g) says to aggregate the two plans.

415(b)(3) says to use comp from the employer.

Note that the 600K distribution with interest might be more than it looks like, although it still looks like you can get 200K of deduction.

It's sort of a shame that the phase-in rules were repealed and that comp isn't "while a participant in this plan".

Option 1 would require that the law firm be a "predecessor employer" under the regs, which may not to be the case. Review the 415 regs. Re the predecessor employer issue, if the new LLC is a law firm, would it be considered "continuation of all or a portion of the trade or business of the former entity"? Since the former law firm is owned by others, one could argue that it is not a predecessor employer. However, it does not seem reasonable that lawyers or others would be allowed to have a series of DB plans with a fresh start for each on 415 limits, just by selling their practices. Thus the IRS would probably think that for lawyers and other professionals, the business is "them" and it follows that the prior business is a predecessor employer. Note that common ownership is not relevant - they are not a common control group since ownership is not coincident.

I'm voting for Option #1 (predecessor employer and use comp from that employer if desired for contribution; aggregate 415 limits, etc....)

I think that's the most viable and proper scenario in my opinion.

It depends on what business the LLC is. If it is a different business, say making candy, for example, then I would disagree.