412(i) funding and DC Plans

[Guest Walt Dallas]

Due to the repeal of 415(e) and the 2001 Act what are the funding limitations when there is a DC and a DB plan?

[Guest Keith N]

Unchanged! If you are taking a deduction for both a DB & DC Plan in the same fiscal year, you are still limited to 25% of covered payroll.

[Guest Walt Dallas]

Thanks for the response. Are referring to the Section 415©(1) (A) limitation? If so the 25% was removed and 100% was put in its place for years beginning after 12.31.2001, under the new Act. So it seems to me on a combined DB and DC plan the limit is 100% of comp. However this is so new I need some discussion.

Thanks

[david rigby]

I'm confused. Are you asking about the benefit limitations of IRC 415 or the deduction limitations of IRC 404?

[Guest Walt Dallas]

I was focused on 415 but you make a good point on 404. With your help I have boiled my question to: If an employer has a DC plan, and is contributing 25,500 to it for each of the 6 employees (all of which are highly comensated), and that employer wants to put in a DB 412(i) plan too in that year, what are the 404 limits? The DB limits? That seems to be the answer under 404(a)(7)(A)(ii).

[david rigby]

That is (sort of) the correct IRC cite. Notice that 412(a)(7)(A) has an introductory paragraph that ends with "...the greater of-".

Thus, the deductible limit for that fiscal year (not plan year) is the greater of 25% of comp, or the amount required (that is, the IRC 412 minimum required contribution) for the DB plan(s). If the DB plan(s) require contribution of 30% of comp, then that should be the amount contributed and deducted, but then the contribution to the DC plan(s) will not be deductible, even if it is required to be made under the terms of the Plan.

Does that address your concern?

[Guest Walt Dallas]

I think you mean 404(a)(7) instead of 412(a)(7) but your point is well taken. SO... then if there is a DB and DC plan, the deduction limits will be the greater of the DC or DB not both. And, if there is a DC and DB plan, and the DB plan is funded to the minimum levels, the contributions to the DC plan will not be deductable. (As an observation, this guts Congress' reason for the repeal of 415(e).)

So is there any way for a single employer to do a DC and DB plan and deduct all of the contributions in excess of the 25% cap?

Your comments are and have been most appreciated.

[david rigby]

Oops, you are correct about the cite to IRC 404(a)(7). The purpose of this section is to limit the deduction taken for all qualified plans when taken as a whole.

I like to think about this issue by using examples.

1. Suppose the DB minimum contibution is 20% of comp, and there is a 10% profit sharing contribution. Then the ER has a total contribution of 30%, but only 25% of it is deductible.

2. Suppose the DB minimum contribution is 12% of comp, but the ER actually contributes 18% to the DB plan [assume otherwise permitted under 404(a)(1)] and the ER also contributes a 10% PS contribution. Then the ER has a total contribution of 28%, but only 25% of it is deductible.

I don't necessarily agree with your comment about the repeal of 415(e). From one perspective, it is a good idea to have this 404(a)(7) still there, thus putting a safety valve on the deductions.

Note in IRC 404(a)(1)(D), that DB plans with more than 100 participants can deduct the "unfunded current liability". This does not alter or increase the 25% test in 404(a)(7). It is my understanding that there is some ambiguity about the precise manner in which this is modified by EGTRRA.

[Guest Walt Dallas]

Thanks I appreciate the comments. The application of 404 effectively kills a 412(i) for an employer with highly compensated persons that has a profit sharing plan funded monthly for 2001. I appreciate the education you gave me today.

[Guest Keith N]

You can't "kill" something that was already dead. You couldn't do it before EGTRRA and you can't do it after. Nothing has changed relating to deductions.

You may want to consider "flip-flop" deductions. There is a whole thread on this board about it, but in general it involves taking two years of db deductions in one year, and two years of dc in the next. It's a bit aggressive, but it can work.

[david rigby]

Flip-flop

http://www.benefitslink.com/boards/index.php?showtopic=8211

[Guest Walt Dallas]

I agree. But what did the repeal of 415(e) really accomplish?

The congressional history states that the repeal was to encourage more plans and I am not sure that has been accomplished.