Can HC contribute to a 401(k) on a DB/DC Carve out?

[Guest Roman]

I know this has been answered before either in this site or the Gray Book but I can't get hold of the answer. And if I remember right, the IRS has flipped-flopped on the answer.

Here is the case: Husband and wife (Owners) participate in a DB; all others (including their kids) participate in a DC with a 401(k) feature. Can the owners contribute to the 401(k) without triggering the 25% 404 limit? Thanks.

[Guest Carol the Writer]

I don't know if this would work, but what about adding bottom-up QNEC's to the 401(k) plan to allow the owners to contribute the max 401(k) limit without worrying about what everyone else is doing. Is that relevant to your question? Or, is the mere presence of the owners as "benefitting" under the 401(k) plan enough to limit the entire arrangement to 25% of participating payroll? Thanks!

[Guest Roman]

Your latter statement is the more relevant. However, the former would depend if the latter could be done without triggering the 25% limit.

[Guest Carol the Writer]

So, this answers both your question and mine. The fact that the HCE's (or anyone, for that matter) both participate in a DB plan and make deferrals to the same plan sponsor's 401(k) plan makes the entire arrangement subject to the 25% limit.

[Blinky the 3-eyed Fish]

Roman, you don't provide enough information to answer your question. EGTRRA added 404(a)(7)©(ii), which says that the 404(a)(7) limitation does not apply to participants in both a DB and 401(k) plan if there are ONLY deferrals into the 401(k) plan.

So, in your situation, if there is a nonelective contribution made in the 401(k) plan, then the 404(a)(7) limitation is triggered, if not, then it's not triggered. The fact that the nonelective may go to those participants that do not participate in the DB plan is irrelevant.

BTW, I don't believe this is a scenario where the IRS has flipped-flopped, although they did add clarifying guidance that the 401(k) plan could have old nonelective balances.

[Guest Roman]

Thanks, Blinky. You have answered my question (albeit unclear). Sometimes we actuaries expect others to read our minds; certainly you did.

Roman