DB & 401(k) Plan

[pbarrett]

We have a long time client who has maintained a db plan with us for years. He is turning the company over to his kids and decided to terminate the db plan in 2002. We have distributed the funds and the client did need to contribute appx $250,000 to meet the funds obligations of the plan. We thought everything was proceeding nicely until the Son of the client mentioned he's done well lately in the market with his 401(k) plan. I asked him about it. Long story short, the son set up a 401(k) plan with a competitor of ours. The all (including our client- Dad) deferred the max. It is also a safe harbor so 3% 100% vested contributions were made. I am not sure if they are planning to make a ps or match contribution.

Our Actuary is stating there is a problem. As it stands now, I believe the deferrals are ok but the safe harbor contribution puts them over the limit. Am I correct?

The CPA is saying the max is 25% of total comp, not a nickle more. We know they can use the db required funding amount. The 5500s have not been filed.

Our Actuary says we should file our 5500 as is and move on. He feels we should have been told about the 401(K). We can't change our numbers. The term papers went to the PBGC and IRS for determination.

The client clearly has a problem. Anyone have any ideas??

I guess we were not informed of the new 401(k) because they felt bad we would not be handling it.

Any thoughts, ideas, suggestions would be appreciated.

[Blinky the 3-eyed Fish]

The 404(a)(7) limit is the greater of the DB funding or 25% of compensation. From what it sounds like, the $250,000 DB contribution is over the 25% limit, thus all nonelective contributions to the DC plan are nondeductible and will be subject to an excise tax. I am not sure what your actuary can do, but the fact that there are DC contributions that are not deductible is not an issue for his purposes. The contribution has already been made and distributed from the plan, so to change the numbers would be very involved and altogether not very kosher.

Sounds like to you have a situation where the client will be hurt for there secretive actions and there isn't a whole lot to do about it.

[Effen]

"You" don't have a problem; "you’re soon to be ex-client" has a problem. The accountant is correct that 25% is the maximum deduction, 404(a)(7). Depending on the timing of the contributions there may be ways to move deductions into different years, but it usually doesn't work without pre-planning. You may want to search for "flip flop". I know it sounds strange, but that’s what it’s called.

I think I would do as your actuary suggested. He/she did a valuation, the client made the proper deposit, he/she properly signed the schedule B. What reason would you have to change anything? Actually, the db contribution was fully deductible. The PS contribution is not.

You may want to point out that if your competitor had asked the correct questions, you’re soon to be ex-client wouldn't have these problems.

[Guest RSNOW]

Didn't EGTRRA add some provisions to reduce/eliminate the excise tax on excess contributions if they don't exceed a certain limit ? I thought pre-EGTRRA it was only available to plans over 100 participants, but EGTRRA dropped it down. I thought you could exempt from excise tax an amount which was like the greater of (a) 6% of total compensation or (b) 401(k) deferrals + match. In addition, I thought there was also an option to replace the above formula (to exempt from excise tax) amounts up to the DB full funding limit amount. I'd appreciate confirmation on this though if anyone knows.

Note, even if this is correct, it doesn't make the excess contributions deductible, just maybe helps ease the pain by reducing/eliminating the excise tax (10%) on some or all otherwise non-deductible contributions.

[pbarrett]

Assume the client takes the db deduction for $250,000, pays excess penalties on safe harbor, what about the deferrals? (25% of eligible comp is about $110,000). One key earned $180,000, deferred 10,000, db cost $69,000. I know the limit on the dc is $40,000, which would include the $10,000. How is the deferral treated here?

[AndyH]

Depends upon what year you are discussing. What was the DB plan year, what is the K plan year, what was the DB termination date, when was the $250 k deposited?

[Blinky the 3-eyed Fish]

RSNOW, you are correct.

[MGB]

(Assuming all of these years are post-EGTRRA effective dates.) As stated previously, a contribution to the DB up to the unfunded CL is deductible, even if over 25% and a nondeductible DC contribution up to 6% can be carried over without being subject to the 10% excise tax. The deferrals are OK.

Under the Portman-Cardin bill, this DC 6% would also be deductible. However, it doesn't look like that will pass this year, so they may be one year out of sync if it passes next year.

[pbarrett]

Thank you all for your assistance. The DB terminated in 2002 and everyone received their distributions amount except one person (who has since been paid). The 401(k) was established and funded for 2002. The $250,000 was deposited in 2002. The safe harbor was actually deposited in 2003 for the 2002 year. The deferrals were made timely during 2002.