Deduction under 404(a)(7)

[Guest PensionNW]

Here is the scenario.

Company A sponsors a DB plan and a DC plan. Initially no one participates in both plans and 404(a)(7) does not apply.

Then, due to turnover and the requirements of 401(a)(26), one of the DC participants becomes a participant in the DB plan but on the condition that she will not recieve any further annual additions in the DC plan.

404(a)(7) mentions "beneficiaries" and since the employee in question would still have an account balance in the DC plan it seems to me that she would be a beneficiary in the DC plan even though she will no longer recieve annual additions in the DC plan 404(a)(7) will now apply to limit the overall deductions of the DB and DC plan.

I have spoken to a collegue who disagrees with me. Does anyone else have an opinion (and hopefully something else to back it up)?

I did find PLR 8252162 where two employees terminate membership in a DC plan, enter a DB plan, AND transfer their vested account balances from the DC plan to the new DB plan. In this case, the IRS opined that 404(a)(7) would not apply to the new DB plan and the existing DC plan. I suspect that the transfer is the key issue here.

[Blinky the 3-eyed Fish]

The transfer issue does appear to be the key. See also PLR 8743096.

Although with the new regulations that say a DB plan and 401(k) only plan do not trigger 404(a)(7), there is some room for interpretation since those PLR's. My recollection is that the IRS was leaning toward or decided that a plan that had existing sources other than 401(k) dollars would not trigger 404(a)(7) if the only contributions in the year in question were deferrals. Thus, it certainly would follow that the requirement that a DC participant would have to have their account transferred would no longer apply.

Of course, it's all a gray area until something gets decided formally.