John Feldt ERPA CPC QPA

An Employer has an existing 401(k) plan that currently covers everyone who meets the age and service requirements. They decide to add a defined benefit plan. When the DB plan is started, they decide to cover only half of the HCEs and half of the NHCEs in the DB plan. At the same time, the 401(k) plan is changed to cover only the employees who are not covered by the DB plan (the other halves). Can the DB plan exclude service prior to the plan's effective date for vesting purposes?

A client has an existing 401(k) plan (3% Safe Harbor Nonelective). The corporate year ends January 31 and so does the plan year. In December 2005, they gave a maybe notice because they might change their retirement plan structure. We are about to propose that they adopt a defined benefit plan to cover 2 HCEs, leaving the 2 other HCEs in the 401(k) plan. 3 NHCEs will be covered in the DB plan and 3 other NHCEs will remain eligible for the 401(k) plan. This makes two plans that do not actively cover any of the same employees. We plan to have the amendment to this effect executed by January 31, 2006. We are concerned by what is considered as being a beneficiary in both plans for deduction limitation purposes - if they can no longer defer or receive any allocation in the 401(k) plan, we are hoping this means that they are not considered to be 'covered' by the 401(k) plan after 01-31-2006. If we set up the DB plan (executed by 1-31-2006) with an effective date of 12-1-2005, a small portion of the 2005 DB plan year would cover some of the same cross-section of participants, so the deduction limit for the corporate year ending 01-31-2006 be equal to 25% of the overall eligible payroll. Now how about the next year, for their deductions for their 01/31/2007 corporate year, will the deduction limit be the DB minimum required contribution plus 25% of the covered payroll for the 401(k) eligible participants plus the 401(k) deferrals (think yes)? Or are we limited to 25% of both plans payroll overall (think no)? If no, how do we get out of the 25% limit? Note: Sal Tripodi's ERISA Outline indicates that the IRS has stated two opposite positions on this, but that they have not ever reiterated their original position (from PLR 8743096) in any later PLRs.

A client has an existing 401(k) plan (3% Safe Harbor Nonelective). The corporate year ends January 31 and so does the plan year. In December 2005, they gave a maybe notice because they might change their retirement plan structure. We are about to propose that they adopt a defined benefit plan to cover 2 HCEs, leaving the 2 other HCEs in the 401(k) plan. 3 NHCEs will be covered in the DB plan and 3 other NHCEs will remain eligible for the 401(k) plan. This makes two plans that do not actively cover any of the same employees. We plan to have the amendment to this effect executed by January 31, 2006. We are concerned by what is considered as being a beneficiary in both plans for deduction limitation purposes - if they can no longer defer or receive any allocation in the 401(k) plan, we are hoping this means that they are not considered to be 'covered' by the 401(k) plan after 01-31-2006. If we set up the DB plan (executed by 1-31-2006) with an effective date of 12-1-2005, a small portion of the 2005 DB plan year would cover some of the same cross-section of participants, so the deduction limit for the corporate year ending 01-31-2006 be equal to 25% of the overall eligible payroll. Now how about the next year, for their deductions for their 01/31/2007 corporate year, will the deduction limit be the DB minimum required contribution plus 25% of the covered payroll for the 401(k) eligible participants plus the 401(k) deferrals (think yes)? Or are we limited to 25% of both plans payroll overall (think no)? If no, how do we get out of the 25% limit? Note: Sal Tripodi's ERISA Outline indicates that the IRS has stated two opposite positions on this, but that they have not ever reiterated their original position (from PLR 8743096) in any later PLRs.