Safe Harbor 401(k) P/S Plan & Defined Benefit Plan - Same Employer

[Guest tgraham]

Five participants in 401(k) plan, four are highly compensated and over 50. For the HCE for 2004, we have deferred 16,000 each and matched 4,320 ($108,000 x 4%). Question: Can we make deductible contributions to a DB plan and still deduct the ee and er contributions? What is the maximum DB contribution we can deduct? Thank you.

[david rigby]

IRC 404(a)(7). When you have both a DB and a DC plan, the maximum combined deduction is the greater of (a) the DB plan minimum required contribution (under IRC 412), or (b) 25% of comp.

[Tom Poje]

and deferrals don't count toward the deduction limit

[Guest tgraham]

Thanks for your input. What happens when the employer makes a 401(k) match contribution and then decides to fund the DB plan that has a minimum contribution in excess of 25% of comp. Does the match have to be returned, since it can't be deducted?

[david rigby]

What do the plans say? Many plans contain language requiring a contribution to be deductible. But absent that issue, in your case, some portion of the total contribution will not be deductible.

A couple of other points:

- Be careful about how you determined the 25% of comp. Perhaps it is greater than you think. Another related discussion:

http://benefitslink.com/boards/index.php?showtopic=23128

- Talk to the actuary.

[Blinky the 3-eyed Fish]

Note you may want to try to avoid 404(a)(7) in future years. It is only triggered if there is a participant common to both plans or if the DC plan makes a nonelective contribution. So for 2005 the latter is an easy one to avoid. You could have everyone in the DB plan and provide deferrals only, no match or PS, in the DC plan. I realize that your ADP test may limit your HCE deferrals, but at least you get more in the DB.