31% DB/DC limit when MRC exceeds 25%

[MLML]

Hello,

A plan sponsor has DB and DC plan.  Eligible compensation for deduction limit is $500K.

25%=125K, 6%=30K.

DC ER contribution is 40K, in order to pass 401a4 (over 6%).

DB MRC is 200K as of the valuation date.  I am confused what the deposit amount and the deductible amount are.  My understanding is...

Deposit amount - 240K (DC 40K, DB 200K), Deductible amount = 230K because the DC amount over 6% cannot be deducted??  If the DB deposit is made after the Val Date, would the deductible amount increase accordingly?

Am I close or totally off.....  Is there a way that a sponsor can deduct full 240K, if the increased DC contribution is due to the failed 401a4 test (I think I read this in one of the posts......but not sure how it works with the actual deduction amount).

Thank you in advance.

[Mike Preston]

5 hours ago, MLML said:

Hello,

A plan sponsor has DB and DC plan.  Eligible compensation for deduction limit is $500K.

25%=125K, 6%=30K.

DC ER contribution is 40K, in order to pass 401a4 (over 6%).

DB MRC is 200K as of the valuation date.  I am confused what the deposit amount and the deductible amount are.  My understanding is...

Deposit amount - 240K (DC 40K, DB 200K), Deductible amount = 230K because the DC amount over 6% cannot be deducted??  If the DB deposit is made after the Val Date, would the deductible amount increase accordingly?

Am I close or totally off.....  Is there a way that a sponsor can deduct full 240K, if the increased DC contribution is due to the failed 401a4 test (I think I read this in one of the posts......but not sure how it works with the actual deduction amount).

Thank you in advance.

 

 

What is the 412 Funding Target? What is the actuarial value of assets? Is all 500k compensation earned by participants who participate in both plans?  If not, break it down. The answer to your first two questions is "Yes, probably."  In order to remove the probably I need the answers to my questions.

[MLML]

Hello,

Funding Target is 1,156,000 and the asset is 996,000.

Normal Cost is 160K and the shortfall installment is 40K (not sure if this is helpful or not..).  MRC due at Val date is 200K.

Yes all participants are in both plans.

I am really hoping your answer is still yes... (yes 230K deduction for 2018). 

I think the DC contribution above 6% (10K) is not deductible in 2018, but will be deductible for 2019... (no way of deducting it for 2018...).. Would you still agree??

Thank you SO MUCH for your time. 

ML

[Mike Preston]

Has the $40,000 been contributed?  If so, what were the dates and amounts?

[MLML]

40K has not been deposited.

[Mike Preston]

Then there is no question that 404a7 limits the 2018 deduction to the sum of (1) 6% of pay, which is $30,000; and, (2) the amount necessary to satisfy minimum funding, which is $200,000 as of the valuation date, but is higher than $200,000 if not deposited on the valuation date.

The additional $10,000 which must be contributed to the defined contribution plan to satisfy 401(a)(4) for the year can be handled a number of ways and everybody has their own favorite. I think it is easiest and cleanest to make the additional $10,000 pursuant to an amendment under 1.401(a)(4)-(11)(g)(3) and to count those $10,000 as the first decutible dollars in 2019.

Note that I'm assuming that your $40,000 amount is correct.  In any well designed combo plan the DC plan is designed with each participant in their own group.  If that is the case, we typically reduce allocations to HCE's to satisfy the 6% rule and don't have to worry about what you are going through.

[MLML]

Hello Mike,

Thank you so much for your valuable time and reply.  Very much appreciated.

I reduced owner's and wife's Profit Sharing to $25 each (I hope this does not create another issue... I typically use $100), and the wife is deferring 24,500 out of 30K salary (which fails the ABT), and every single employee is older than the owner, except one.. and that employee is only one year younger than the owner, so it is difficult to pass 401a4... And the assets did not do well in 2018 (like many other plans), so the MRC is more than the paycredits, which requires some explanations to the owner because he does not understand where the rest of the money goes to (MRC - paycredits=$x "who gets $x").... I am not trying to make excuses, but in addition to this, employees' paycredits are flat $, not percentage, so the fact that employees' wages are going up every year makes things worse.... I try to make design changes, and the client is open to it, but every year, somehow someway, it works out to his "ok" satisfaction, so he does not feel it is urgent to change things....

In reality, the $10K is a lot smaller, but this is one of my difficult clients so I wanted to be prepared, and getting replies from you means a lot!

Thank you.

ML