I'm reviewing a proposal for a DB/DC combo for '06.
Client has a profit sharing plan and is thinking about adopting a DB relatively soon.

According to my understanding of PPA, any employER profit sharing contribution in excess of 6% of eligible payroll is not deductible.

Am I correct?

Thanks.

Lots of discussions about this on the defined benefit board that you might want to check out.

At this point I believe we are awaiting Regs to determine exactly what this provision means.

My take is that it would be deductible IFF the combined contribution was 25% of pay or less; otherwise not. Anybody disagree?

For clients where at least one participant is a "beneficiary" in both plans, we are taking this approach:
1. the minimum required contribution to the DB plan is deductible, plus
2. the employee deferrals in the 401(k) are ignored (i.e. deducted), plus
3. contributions up to the first 6% of eligible compensation for ER contributions in the DC plan (match, nonelective, etc.) are also ignored (thus deductible), plus
4. anything above 6% in the DC is deductible but only up to the point where DB + (the DC% above 6%) is equal to or less than 25% of elig comp

For example, if the DB minimum was 18% of pay, and they somehow goofed by contributing 15% of pay to the DC plan, then the DB contibution is deductible, plus 6% of DC is ignored for purposes of 404(a)(7) under PPA 2006 (thus it's deductible), AND of the remaining 9% (DC money) only the 7% portion is deducted, leaving 2% that cannot be deducted. This becomes a 31% deduction plus a 2% nondeductible contribution.

1. 18% minimum DB - deductible
2. x% deferrals DC - ignorable (deducted)
3. 6% ignorable DC - ignored (deductible)
4. 7% considered DC - deductible (DB + DC <= 25%)
5. 2% considered DC - nondeductible - the DB + this DC portion now exceeds 25%

In this example, if they had contributed only 13% to the DC, our approach would be to deduct it all, DB and DC.

Numbers 3 and 4 might be in question, of course, but that is our approach for today.

By "beneficiary" we take the approach that the employee is benefitting (receiving an accrual / receiving an allocation).

I think we agree except I did not take a position on the 6% DC deductibility when the DC exceeds 6%-lose all or lose some? Open question I think.

Then there are the details such as what is the minimum DB - i.e. include 150% RPA unfunded? 100%? Or just the 412 minimum. I think the 150% reverts to 100% once the DC exceeds 6%.

We interpret the law this way:
1. DB plan deduction comes first, based on 412 MINIMUM
2. DB plan may optionally deduct up to 150% CL.
3. If 1 above exceeds 25% of pay, you may ALSO deduct up to 6% in a DC plan
4. If 1 above is 19% or more you can deduct up to 6% in a DC plan
5. If 1 above is under 19%, you can deduct the difference of 25% and the DB %.
6. If you are using 2 above you get the OLD rule you can deduct up to 25% minus the DB which means you may not be able to deduct ANY DC.

This would be the conservative approach until we get guidance.

Conservative? Has someone stolen rcline46's identity? Shocking!