Cross Testing & IRC 404(a)(7)(A)

[Guest Rob Kobrine]

I couldn't decide whether to put my question in the cross-tested section or the defined benefit section, so I did both. Hope it's not a problem.

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?

[jaemmons]

The deduction limit for DC/DB arrangements is the greater of 25% of eligible compensation (between both plans) or whatever is necessary to fund the DB plan (IRC 412 minimum funding requirement). Restructuring the plans would not impact the 25% part of this limit.

[Guest Rob Kobrine]

But it is my understanding that if no individual employee benefits under both plans for a year, then the plans are not subject to the IRC Section 404(a)(7) limit.

I think my question comes down to: does the fact the Employees have an existing accrued benefit in the cash balance db plan eliminate for me the exception to the 25% deduction limit?

[Guest seissler]

The 2004 ERISA Outline Book Chapter 7 on "overlapping" plans takes the position that it is "benefiting" participants who are considered for purposes of 404(a)(7), using the current 410(b) coverage rules,and those are participants receiving an allocation or accruing a benefit that year. However it also refers to the ASPA October 2003 conference at which IRS representatives stated that an account balance or accrued benefit for an inactive participant in a plan causes that participant to be counted as a "beneficiary". The ERISA Book suggests transferring balances from one plan to another so that all balances for an active participant are in one plan to avoid this problem until there is a formal ruling on this. I don't have any information more recent than this. Hope this helps.

[Blinky the 3-eyed Fish]

Fine advice, but this situation is reversed. Transferring a DB accrued benefit into a DC plan is not a good idea. The DB amounts transferred would retain their DB characteristics, including the fact that they are a defined benefit. A nonsensical result ensues if the DC plan were to have negative returns. Anyway, since the question references 2004, it's too late.