What if my income is inconsistent from year to year? What does this do to my funding?

This is a common concern. Let’s say this year is a great year for you and you want to put large amounts into a cash balance plan.

But you have concerns about next year. Maybe that large contract might not renew? Maybe you want to work fewer hours? In any case, you are concerned about future plan contribution amounts. We see it all the time.

We understand that business income can fluctuate from year to year. That’s why we have a few strategies that can solve this problem.

#1 – Adjust compensation

Assuming your business is structured as an S-Corporation, a big driver of the annual contribution amount is your W2 compensation. So if your income is way down, presumably your compensation might be down as well. Please realize that you still are required to pay yourself reasonable compensation. But lowering compensation is a big consideration.

#2 – Fund low end of range

When an actuary calculates required annual contributions, there are certain assumptions and estimates. These items will typically provide a funding range. For example, your funding range may be $60k to $100k. This will provide you with some discretion to fund larger amounts in good years and lower amounts in other.

#3 – Amend the plan

Lastly, you can always amend the plan to provide for lower contributions (subject to testing). However, you cannot amend the plan to lower benefit amount once employees have met eligibility for the year. This would typically be working 1,000 hours.