December 31 is fast approaching. For the small business owner with a calendar tax year, it is time to start estimating profits and tax liabilities. For the small business owner with a defined benefit pension plan, that means looking at the expected contribution to the pension plan and what it can do to minimize the tax liability. In many cases, what would be a significant tax liability is reduced or eliminated via the pension plan.

We at IAI are prepared to work with our clients and their tax advisors to make the best possible use of the client’s pension plan. As with other aspects of business, a little advance planning can go a long way toward a successful end of the year.

Here is a typical scenario. Between now and year end, you or your client contacts an IAI consulting actuary. You provide us with estimated salary information for the employees and a projection of the value of plan assets as of December 31, 2002. Projecting assets can be a tricky proposition, so we sometimes will do multiple calculations at differing asset values.

We take the information you provide us and give you an estimate of what the 2002 contribution will be. It is important to keep in mind that this is an estimate and although in most cases it proves to be close to the final calculation, in other cases the final calculation can produce a substantially different result. The more accurate the salary and asset estimates are, the more accurate our estimate of the contribution.

If the estimated contribution for 2002 is in line with the client’s expectations and ability to pay, the planning is done. The final calculation will be prepared as soon after the end of the year as we get the actual salary and asset information and we get the time to work on the plan.

If the estimated contribution for 2002 is more than the client’s expectations or ability to pay, actions can be taken to remedy the situation. Possible remedies include amending the plan, delaying the contribution or portions of the contribution to next year, or even terminating the plan if need be. What is most important is that without planning in advance, the deadline for completing certain remedies may pass before action is taken. December 31^st and the following March 15^th are both relevant deadlines for some of the remedies.