404(a)(7) Limit

[david rigby]

PS plan year is CY. Company fiscal year is CY. DB plan year ends 9/30. So we determine the 25% limit based on the DC plan year ending 12/31/2003 and the DB plan year ending 9/30/2003.

But now the company decides to "fix" the DB plan year, using a 3-month short plan year 10/1/03 thru 12/31/03. Since there are now two DB plan years ending in fiscal year 2003, does this impact the determination of the 25% limit? (teh short plan year contribution will be contributed in 2004, and the company has anticiapted that it would be deducted in 2004.)

[Mike Preston]

I don't think so. The 25% limit is based on compensation paid during the fiscal year, so assuming the same eligible participants, there is no modification to the 25% limit for the CY in question. Am I misunderstanding the question?

[david rigby]

Thanks. I’ll try again.

The compensation to be used is the 2003 CY comp of all participants who

- received a PS allocation in the DC plan, or

- received a safe harbor match in that same plan, plus

- benefited in the DB plan year ending 9/30/03, even if they did not receive a DC plan contribution.

But since there is also a short DB plan year, also include the comp of any participant who benefited during that year (perhaps no one who is not already counted, but at least we check for this). Did I get it all?

[Mike Preston]

Almost. I'm not sure I agree with the description of those in the DB plan as having to "benefit for the year." 404a7 uses strange language and talks about people being beneficiaries of the trust during the year. That isn't the same language as in 410(b), so the concept of benefiting isn't precisely the same as what is needed for 404a7. I think a participant is a beneficiary of a db plan if they are a participant in said plan, as long as they have a positive accrued benefit at any point in time during the year. Otherwise, frozen plans wouldn't allow for compensation to be included.

Also, you have now added "safe harbor match" to the description, so what used to be a PS plan is now a 401(k) plan. Hence, you get to count the salary of those that are eligible for the 401(k), whether they deferred or not (of course, this completely encompasses those that receive a SH match). This was clarified at an ASPA Q&A just after EGTRRA passed. There were some (pessimists?) who thought that in the case of a participant who was eligible for the 401(k) but who didn't defer that said individual's compensation wouldn't count for a7 purposes. At the time, the IRS was quite clear: it counts.

But if you expand those two areas, I think you've got it.

[Blinky the 3-eyed Fish]

Mike, Jim Holland stated at the LA Benefits Conference that people eligible to defer but didn't (and didn't benefit in any other way) would not have their compensation count. It was quite a shock to most of the crowd, some of the panel and to me.

I always take those comments with a grain of salt though.

[Mike Preston]

That is inconsistent with comments previously made by the IRS. (sigh) Another thing that we have to look up where it came from to debunk a reversal, of sorts, huh? So be it. Don't have time for it today, but I'm confident somebody else will do it. If not, hopefully I can do it next month.

[Blinky the 3-eyed Fish]

I was just going to ignore Holland's remarks.

[AndyH]

ok, I'll do the dirty work on this one.

ASPA 10/02 Q&A's. And this one is actually in writing.

Questions for Discussion

"1. A participant in a 401(k) plan is eligible to make electie deferrals but does not do so. Due to an end of year requirement the individual will not share in matching or employer profit sharing contributions. At the 1996 ASPA annual conference (Q&A 1996) the Service indicated that such person's compensation was includible for purposes of the deductible limit under Section 404(a)(3).

Under Code Section 404(n) as added by EGTRRA, elective deferrals are no longer considered employer contributions. With this change will the compensation of participants such as this individual be included for purposes of determining the deductible limit under Section 404(a)(3)? If not, would it be includible if there was no end of year requirement for the matching contribution such that the participant would have received a matching contribution had he deferred?"

Answer: "Under the change in law, these individuals are still eligible under the plan and their compensation is included for purposes of the maximum deduction limitations."

This is in writing. And I have a note next to it that says "No hesitation!"

[Mike Preston]

Thanks, Andy. I, like you, remember it clearly.

[Guest joe22]

We have a situation with a different twist on the deduction limit. WE have a DB Plan covering 2 HCE participants and a DC that covers 3 additional (2 HCEs) for a PSP allocation. The 25% compensation combined limit does not apply since there are mutually exclusive employees covered by each plan. If the 2 HCE covered under the DB Plan also have 401(k) deferrals in the DC Plan, does this change the result such that the 25% limitation would apply for both plans?

Any thoughts.