"Sandy Wing" <jacksonbb[at]fusemail.com> wrote:

- quote -

There are two basic types of pension plans - Defined
Contribution and Defined Benefit. Defined Contribution
plans are based around how much money gets put in. Defined
Benefit plans are based around how much money gets paid out
to the recipient in retirement. The retirement plans of our
fathers and grandfathers were usually defined benefit plans
- they got a check for the rest of their life in retirement.

Defined Contribution plans have funding requirements that
are very, VERY flexible, they cost less to administer, and
the majority of the funding requirement can be shifted to
the employee. For this reason, the defined contribution
plan can be more attractive to the small business owner.

Defined Benefit plans have funding requirements that are
very, VERY difficult to change, they cost more to
administer, and the majority of the funding requirement is
on the employer. For this reason, most businesses,
including and especially small businesses, shy away from the
defined benefit plan. HOWEVER, there is a small niche for
the defined benefit plan in the small business community.
For a company with excessive cash flow, where the owner is
significantly older than the older employee (or where the
employees are family members), where there are few
employees, where the owner is anticipating retirement in the
next 5 to 10 years - a defined benefit plan allows the owner
to dump significant amounts of money in his retirement plan
ensuring a stream of income for retirement.

Currently, the maximum that can be put into a defined
benefit plan is somewhere near $160,000 per year, per
participant. The actual amount is calculated using the age
of the participant and the amount of retirement income to
provide, which is tied to current income. These products
are usually required to be funded with fixed income
investments for several reasons - first, because the plan
will guarantee an retirement income it can only be subject
to so much market fluctuation; second, a fixed income
investment simplifies the calculations necessary to
determine the current contribution; and thirdly, because the
law requires it. There are a myriad of other reasons as
well, but I won't get into that here.

Ideally, a defined benefit plan works best for the 55 year
old business owner taking a substantial salary and still
having several hundred thousand dollars left over in cash,
with 5 to 7 employees, the oldest of which is in their 20s,
who wishes to retire between 60 and 62 and anticipates
selling or closing the business. If this fairly
approximates your situation you should seriously consider
discussing a defined benefit plan with a financial advisor
well versed in retirement planning AND with your accountant.

Even if this doesn't fit your fact profile, if you have $1M
a year in excess profits and cash there are strategies and
investments that will allow you to defer taxes on some of
this money for as long as 30 years. Again, you will need to
work with someone who is familiar with these types of plans,
not every broker does this kind of work so you will need a
specialist. If necessary, contact me off channel and let me
know where you live and I can try to refer you to someone in
your area that may be able to help you.

For your next question, about the check you were handed on
12/22/04 - the issue here is the Constructive Receipt
Doctrine, or when the money became absolutely available to
you. Once this happens it becomes income to you regardless
of what method of accounting you use either for your books
or your tax returns. Once you have been given unrestricted
access to money that you have earned and are entitled to, it
doesn't matter when you actually spend it. And getting the
check is the same as getting cash UNLESS you presented the
check to the bank for payment and it was rejected for some
reason. It would be the same as if I gave you a sealed
envelope with cash inside on 12/22/04 and you didn't open it
until 01/05/04 - you got the money, you had earned it, you
had unrestricted access to it, that you CHOSE not to open
the envelope until the following year is of no consequence -
the money is taxable to you.

1099s are not required to be issued to corporations, except
legal corporations (read that law firms) so I'm sure why the
sent you a 1099 to begin with. However, while there is no
requirement to send the 1099, there is also no prohibition
against sending one, so even though they don't have to, they
can send you one if they want to. I have quite a few
clients that always send 1099s to everyone - its easier for
them to do this than to try to remember who gets one and who
doesn't and they would rather send one that they didn't have
to send then miss one they should have sent. Either way,
its immaterial - you had the check, you report it as income.

Gene E. Utterback, EA

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Sandy Wing wrote:

- quote -

Tempted to answer your first question by saying "not very
well". Really though, defined benefit plans are passe for
most corporations who are trying to save money (not taxes!)
by opting for profit sharing arrangements, e.g. 401k plans.

So then, real answer is, it depends. Your accountant should
be able to give you a comparison of different types of plans
and the tax effects of each so that you can make the
decision.

- quote -

Here is a perrenial question accountants get. Girl called
me just yesterday about such a check from one of the
corporation's debtor. (It's a note receivable for the
accrual basis corporation, btw) She asked if she should hold
it until after June 30th or does she have to go ahead and
deposit it now, before the end of the fiscal year.
Furthermore, she wasn't even sure if the check was good, and
asked if that were a factor even. (grin)

In this case it doesnt matter, cause the corporation has to
accrue that interst anyway as income.

But if it were an ordinary check, say to pay for services in
your case, the fact that you have received it before end of
year makes it de facto income. And btw, they will not
issue a 1099-misc to your corporation, because corporations
as payees are exempt from receiving such.

Cheer$,
Harlan Lunsford, EA n LA

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Sandy Wing wrote:

- quote -

This subject is too complex to go into here as there are a
myriad of rules that affect Defined Benefit Plans. There are
also different kinds of defined benefit plans. They are
also the most expensive to administer. However, they do
offer numerous tax benefits to both the employer and
employee. Fortunately, the Joint Committee on Taxation
published a summary on how these plans work. Here is the
link: http://www.house.gov/jct/x-71-02.pdf

- quote -

You would have constructive receipt on 12/22/04. It would be
2004 income.

--
Alan
http://taxtopics.net

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Sandy Wing wrote:

- quote -

Either well or poorly, depending on the type of plan you
pick and what you hope to get out of it.

- quote -

Your accountant should be happy to explain everything you
want to know about defined benefit plans. That person knows
much more about your specific situation than we do.

- quote -

It may depend on whether you're cash basis or accrual basis,
but in general, it would be income in 2004 (the year you
received the check), not 2005 (the year you deposited the
check).

- quote -

Then they reported it correctly, assuming that you're in an
industry in which corps get 1099s at all.

Phoebe

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1. How do defined benefits plan work? SInce I operate a
family corp with over a million in annual profits i was told
by my accountant I should do this to save taxes?

2. Also, if someone handed you a check on December 22,2004
and you don't deposit it till Jan 2, 2005, is that check
still considered income for 2004 or 2003? What if on their
end they reported it on the 1099-MISC for your corp?

Thanks for any info you may provide

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