Prior accrued benefit in Cash Balance Plan & IRC 404(a)(7)(A)

[Guest Rob Kobrine]

If I have a small plan DB/DC arrangement where all 10 employees are in both the cash balance plan and the profit sharing plan in 2004, can I avoid the 25% of compensation deduction limit for 2005 if the plans are structured so only 4 participants receive contribution credits in the cash balance plan and the other 6 receive contributions in the DC plan?

Does the fact that the participants have an existing accrued benefit in the cash balance plan leave me stuck with the 25% limit?

[Blinky the 3-eyed Fish]

In my opinion, yes, you are subject to the 404(a)(7) limit. The old PLR (no time to look up the number) stated that participants with balances in the DC plan triggered 404(a)(7) even if they weren't receiving a DC allocation for the year. This situation is the reverse, but I believe the same principal applies.

BTW, please don't post the same question twice. I just came across the second version.

[JAY21]

I would recommend digging into this issue a little further. One of the speakers at the 2004 Washington, D.C. APSA conference stated that during the 2003 ASPA conference the position that Blinky mentioned was considered the rule-of-the-day for the 2003 ASPA conference, but the speaker went on to say this issue needed a correction (for 2004) as the IRS had "clarified" (perhaps not in writing though) that merely being a beneficiary of a plan (i.e, having an account balance in the plan) was no longer by itself considered to be sufficient to trigger the 25% combined plan rule if no common participant received a contribution/accrual for the same year.

I listened to about 5 CDs of the 2004 ASPA conference so I can't quickly find who made that statement, so given the lack of exact cite on my part (and the possible informal manner of the IRS comments), I can only suggest looking into this a bit further before giving up on the issue.

[Guest merlin]

JAY21, you may be thinking of Kurt Piper's session on DB/DC Combinations.

[JAY21]

Merlin, you are correct. It was Kurt Piper's 2004 ASPA (D.C.) workshop on DB-DC Combo plans. I listened to that part of the CD this morning and it wasn't that the IRS had clarified anything recently, rather Kurt said the IRS has already ruled on this issue in an old Rev. Ruling 65-295 which deals with who is a "beneficiary" (participant) for purposes of using compensation for the 25% deduction limit under 404(a). His point is that the IRS ruled that "merely" being a beneficiary under a plan (e.g., having an account balance but not being an active participant) is not sufficient to allow use of the compensation of the beneficiary in the 25% deduction limit. Kurt seems to be saying that the IRS is therefore locked into the same def'n for 404(a)(7) purposes in that merely having a DC account balance (e.g., prior PS contributions) is NOT sufficient to make them a beneficiary (participant) under multiple plans (common participants) for 404(a)(7) if they are ONLY getting a contribution/accrual under ONE of the plans for the current year.

I'm probably paraphrasing his comments badly, so any clean-up or improvement is welcome.