DB-DC offset & 404(a)(7) max

[Guest Mike Spickard]

I have a 3-person client who is providing a nonsafe harbor DB benefit equal to the 415 limit for the owner, and 2% of pay accrual for the rank and file. The DB benefit is offset by 10% of pay contributions provided in the DC plan. The 2 non-owner employees are in their 30's so the DB benefit is completely offset by the DC contributions/balances. The owner is in his early 70's, and gets about a $250,000 annual contribution in the DB plan, and has nothing in the DC plan.

Since my 2 non-owner employees accrue nothing in the DB plan, and are not even considered in the participant count (at least for PBGC purposes), am I still subject to the overall 404(a)(7) limit of the greater of 25% of payroll or the DB min.?

Or can I reason that I do not have any of the same participants in both plans (since my non-HCE's have no benefit and are projected to have none), and that the deduction limits apply to the plans separately?

Everything appears to test out OK when cross testing the PS contributions.

[AndyH]

If you could argue that you only had one participant in the DB plan, wouldn't you have a problem with 401(a)(26)? What about 410(b)?

[Guest Mike Spickard]

I satisfy the 401(a)(26) before the offset, and the aggregated plans pass 410(b) and 401(a)(4).

I understand I want to have my cake and eat it too. But thinking about why 404a7 exists, it is to restrict/limit funding for plans that contain the same participants. I will not be funding for the same participants in both plans. From a funding (and benefit) perspective, I have 2 separate plans that do not contain the same participants.

[mbozek]

See Reg 1.404(a)-13(a).

[AndyH]

It would seem to come down to the definition of "beneficiary" for 404 purposes. Where is that defined?

[Guest Mike Spickard]

The regs. seem to indicate that for there to be overlapping participants, that they have to be "beneficiaries of the funds accumulated under such trust

or plan".

They also use the word "cover" but I think that the definition above gives me enough room to maneuver because in my 2 plans there are no overlapping "beneficiaries of the funds accumulated under such trust

or plan".

Would you agree?

[Mike Preston]

That cite doesn't help much, because the argument being put forth is that an individual that is fully offset should not be treated as a beneficiary of the trust for purposes of 404a7. There is no guidance as to what constitutes a beneficiary of the trust for purposes of 404a7. I don't think that the fact that the PBGC allows for a fully offset individual to be ignored in the determination of the PBGC premium means much in the context of 404a7.

Since there is no guidance, you just might win, if it comes down to a dog-eat-dog fight. Do you really want to be in one of those?

[Guest Mike Spickard]

I've resigned myself to look for other ways to resolve the problem, but the 2-plan results were fantastic since this owner is past age 65, and accruing a high benefit as a percent of pay in the DB plan. I need to give massive annual accruals in the DB plan, or "equivalent" contributions in the DC plan. There's much more bang for the buck in the DC plan for the 2 younger employees.

[Guest Mike Spickard]

Mike, I agree that the PBGC count determination is pretty much irrelevant, but I think that the (a)(13) reg is not. "Beneficiary of funds accumulated under the plan" sounds pretty specific and useful in determining if you have overlapping participants. Of course, I have my position and am now trying to find chapter and verse to prove my point.

Sounds like some religious discussions I have been in...

[Mike Preston]

I don't see your logic at all. If you are trying to claim that they aren't beneficiaries of the funds in that plan then I defy you to tell me what will happen with those funds if their PS account balances are all invested in whatever the next Enron happens to be. I think they will be directed at, pointed to, and/or otherwise utilized for those specific individuals. If you want to argue that they aren't beneficiaries because, should the plan terminate right now, they would be entitled to not one dime, go ahead. About as good as any other religious argument I've heard lately. ;-)

[Guest Mike Spickard]

Mike - I think you answered your own and my question. Clearly you agree with me that while the PS account balance and contributions provide/offset the entirety of the accrued and projected benefit, "those funds" in the DB plan are not for the benefit of those in the PS plan.

Webster's 1913 states that a beneficiary is "One who receives anything as a gift; one who receives a benefit or advantage; esp. one who receives help or income from an educational fund or a trust estate."

I don't perceive they are receiving anything right now in the DB plan - whether or not the plan terminates or they terminate.

When and if the time comes that such assets must be tapped into and theoretically set aside for the PS participants, they then do become beneficiaries of the funds accumulated in the DB trust. Of course, it is in the clients best interest to keep the PS funds well-managed and for him to continue to make generous contributions.

The reg section does not appear to address how to structure the plan based upon "what might happen", but rather what is happening at the moment. Of course the client would need to be educated that things could change and the ramifications.

[Mike Preston]

I think I hear the sound of a rubber band being stretched mighty tight. Those things hurt when they break, you know.

I think that having the floor available satisfies the definition of being a beneficiary in the Webster sense. I'd be very surprised if counsel for your client didn't.

But as far as whether it rises to the level of satisfying the definition of beneficiary as intended under 404a7 and the regulations thereunder, that is entirely up in the air!

[MGB]

I find these "stretches" of rules and the arguments (if they can be called that) to support it absolutely disgusting. No wonder we need new laws like Sarbanes-Oxley and new specific rules from standards setters with practitioners like this running around.

404(a)(7) is applicable here, period.

[Guest Mike Spickard]

MGB - please explain what rule is being stretched here. We are discussing interpretation of regulations here. No one has provided a shred of citation of code or regulations that contradicts me. The only reg cited leaves enough room to drive a truck through (in my opinion of course).

Was 404(a)(7) intended to cap funding/deductions for benefits of the same participants in 2 plans or wasn't it? The reg appears to thunder "yes" but others see it differently. They reason that someone just might in the future benefit from the funds in the trust. Well, what if my account balance is eventually worth 3 times what the DB benefit would be? When does "might" end, or get so small that it becomes "likely never"?

I just want some sort of citation or even a well-reasoned "smell test" under the defintion of what constitutes a beneficiary of funds in a trust.

And what in tarnation does Sarbanes-Oxley have to do with this discussion?

[Mike Preston]

Whether I agree or disagree is not the issue. If we can't pummel a point to death and argue mercilessly about angels, pins, dancing and things of that nature, Judge Learned Hand would be mighty disappointed with us.

Remember, MGB, we are talking here about the ability to increase benefits for certain non-highly compensated participants. Yes, the same logic can be used to generate additional benefits for HCE's, but the sword cuts both ways (and must do so under our tax system).

So, while I don't agree with it at the moment, I'm actually rooting for Mike to convince me that a cite does exist somewhere so I can layer a DC plan for NHCE's on top of a DB plan that is more generous than will fit right now under the 25% limit. Of course, I could suggest that the design of the DB plan be modified to reduce the benefits for the owners and managers. I'm sure you can tell where that suggestion will end up.

These things really do cut both ways.

I just want to make sure that, if at all possible, no blood is spilled by the edges of whatever happens to be sharp.

Have I mixed enough metaphors for one day?

[Belgarath]

You may have even mets your mixtaphors. Hard to tell at this point. I agree that it would be better if no blood is spilled. One of the things I enjoy about these boards is the creativity of the questions/approaches - I learn a lot, and even though I frequently disagree, I respect the opinions. It's good once in a while for someone to point out that the Emperor isn't wearing any clothes, as long as the pointing is done with blunt instruments rather than sharp edges as you have noted. Happy Holidays to all!

[Guest Mike Spickard]

Well said Mr. Preston. God knows I have no desire to break, ignore or unreasonably stretch any rules. The question remains for me: does 401(a)(7) apply? Why or why not?

[Guest archon]

Didn't we blow by 401(a)(26) a little too quickly in our religious truck with sharp edges that transports tiny little angels?

I believe 1.401(a)(26)-5(a)(2) says the two NHCE's in this example do not benefit for 401(a)(26). They would benefit only if "The employees who benefit under the formula being tested also benefit under the other plan on a reasonable and uniform basis."

I have taken it on faith that this meant my profit sharing plan needs to be a non-integrated (or integrated?) one covering everyone with a benefit being offset in the DB.

That puts my HCE back into both plans and ends the discussion.

You can have your cake and eat it too, but none of it is deductible and it will make you fat. Then you can dress up in tiny little tights and gross us all out by dancing with Judge Learned Hand.

[Mike Preston]

Oooh, can we tell it is near the end of the year?

We probably did blow by a26 a bit too quickly. Partially because that is a discussion that can drag on and on, as well. The definition of "reasonable and uniform" in the a26 regs has always caused me consternation because of something I heard in the early 90's which indicated that the design that Mike S. speaks of can work while other things I've heard more recently indicate that it doesn't. So I decided to ignore it....for now.

We've also got the Paul Schulz memo to contend with.

No matter, I'd prefer to focus on the issue that Mike S. has brought up to see whether there are any cites.

This is purely selfish on my part, because I have a plan where the client would implement the floor in a New York second if it could, but doesn't want to lose the 404a7 exemption. While the NHCE's would be fully offset for the next few years, the client would like to see the DB provide a floor, just in case. To date, I've said: No can do.

But I suspect the focus I prefer will no longer be possible.

Que will be, sera. ;-)

[Mike Preston]

Who's Mr. Preston? Oh, yeah. That's my Dad! At least he's been to the upper floors of 1111 Constitution (get the tape from my session at ASPA a couple of months ago to hear how he got there).

Anyway, I've already given my thoughts on this so I'll try to fade into the background.

[Guest archon]

I'd very much like to hear how you can make the 401(a)(26) issue in this case drag on and on if you have a few minutes sometime.

I'm game to ignore that issue for the moment though. My argument would then be that it seems incredibly optimistic to think we can argue that a participant benefits for 410(b), benefits for 401(a)(26), but is not a beneficiary for 404(a)(7).

Going back to our butchered metaphors, that sounds about as possible as a camel going through the eye of a needle, with or without dancing angels.

Mr. Spickard will attest by the way that my previous note was completely tongue in cheek. I don't have a serious bone in my body whether it's the end of the year or not. I love theoretical exercises too, so to quote the "Botcher of Bagdad", "Bring it on".

:=)

[AndyH]

And, Mike S., while your attempted creativity is interesting, I agree with MGB that the stretching is excessive.

And I repeat my citations. They are called 401(a)(26) and 410(b). These people are participants. They are earning and retaining credited service. They have rights under ERISA. They are beneficiaries.

p.s. And Mr. Preston's son's story was terrific. Get the tape.