Expert: Allen - 12/2/2005

Question
Allen,

Thank you for prompt reply. I would appreciate a ballpark figure of what it costs to establish such a plan.

Thanks again, Tom


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Followup To
Question -
I am 55 and have been recommended to consider a defined benefit plan. I currently have a Profit Sharing and Money Purchase plan. I contribute the maximum $41,000 to both plans combined.

With a defined benefit plan, I understand I would qualify for the $165,000 max benefit based on my salary. I am a one man company - manufacturer's rep.

To get the $165,000 max annual benefit, what would be the amount of tax deduction I could take over the next 7 years (planned retirement at 62) and what would be estimate of expenses to set up and maintain a plan like this?

What considerations should I have and what questions should I ask of possible providers of a defined benefit plan?
Answer -
You have been given some good advice. A few comments:
1. The limit on contributions to your current plans is $42,000 not $41,000 (assuming your Schedule C income is high enough).
2. You could increase the contribution to your existing plans to $46,000 by adding a 401k feature to the profit sharing plan.
3. If you stay with the current arrangement, you should probably terminate the money purchase plan. This would not reduce the amount you can contribute due to a change made in the law in 2001. But it would reduce your administrative expenses.
4. You can establish a defined benefit plan in place of your current plans and contribute approximately $150,000 or a little more (again assuming your income is high enough). Either I or another actuary can determine the exact amount.
5. If you are interested in the defined benefit plan option, you should engage an actuary. If you are in the Washington D.C. area, you can contact me for details on the amount of the contribution and our fees (301-762-6600)
6. If you are in another area of the country, we could still work with you. However, if you felt more comfortable working with an individual in your area, I might be able to give you a referral.
7. We charge for consultations based on our hourly rates. If you established a plan through me, the charge for consultations would be included in the fee for establishing the plan. If you did not establish a plan, we would charge based on the time in discussions. My hourly rate is $225. In any event, I believe you should deal with a person who has experience dealing with one person defined benefit plans and should probably not deal with someone who is also investing the assets of the plan for you.


Answer
My firm charges $1,750 for the papers to establish the plan. The annual fee, which is charged in all years including the first year, is based on our standard time charges and typically runs $1,200 to $1,500. There would also be some charges if we were involved in terminating the old plans and preparing the annual Form 5500EZ for 2005 (and 2006 if assets weren't transferred out by the end of the year). Our charges cover all required papers needed to establish and maintain the plan.