DB/DC COmbined Plan Limits

[Gary]

A thought occurred to me. And then I determined that my thought is not going to fly. However, I am curious to hear the feedback I get regarding my thought.

Say we have a one person DB plan and that same person is also in a profit sharing plan.

We know that the deduction limit is at least as much as the minimum funding (which is no less than the RPA '94 CL).

Say the person has compensation of $200,000

Say it is a new plan and the one person enters the DB plan with 5 years of past service.

Say the first year valuation under the aggregate method produces a normal cost minimum funding of $50,000 and a 404 unfunded CL of $100,000.

We know the person can contribute and dedut $100,000 to the DB plan.

What about contributing $50,000 to the DB plan (to meet minimum) and $50,000 to the DC plan (I suppose we certainly can't go above 25% of compensation)? This results in a deduction of $100,000 which complies with the UCL limit. The obvious benefit to the employer is thus to have more deduction opportunities in the DB plan by only putting in 50k in the first year.

I like the idea, but unfortunately, I realize it won't make it past the tight defense of this post.

Thanks.

[Guest Carol the Writer]

One thing jumps out immediately. That is that $50,000 is in excess of the 415 $ limit for DC plans and therefore is not allocable. If I recollect correctly, the maximum DC deduction is also limited by the amount that can be allocated under Code Sec. 415.

[david rigby]

Seems like trying to put apples into a cherry pie, and then claiming it is still a cherry pie. The 404 UCL is independent of the combined deduction limit, so we get to whether the $50K DC contribution is OK on its own face. If it is, it can be deducted. As Carol states, nothing trumps 415.

[FAPInJax]

I believe, additionally, that the IRS has stated that there is a 24 month lookback rule for determining HCE benefits for the unfunded current liability AND that it applies to new plans. In short, the unfunded current liability is not available for the first several years.

[SoCalActuary]

Look for clarification at the ASPPPPPA conference on the deductions for new plans.

A substantial number of people are on both sides of this issue. Does a new plan constitute an

amendment that cannot be considered for the 150% or 100% CL deduction rules?

In addition, the deduction is limited to the greater of the DB minimum contribution or 25% of pay,

plus you get to add another 6% of pay for a DC plan.

Any DC contribution above 6% of pay would not be deductible, and would be subject to excise tax,

assuming the DB deduction uses up the 25% deduction by itself.

If the DB deduction is $50,000 in your example, the DC is deductible to $12,000.

If the DB deduction is less than $18,000, then you deduct the DC limit of $44,000, plus the DB deduction.

Any other DB deduction between $18k & $50k results in a total deduction of $62k or less.

If the DB deduction is more than $50k, then you get the DB + $12K DC.

[Gary]

Regarding the IRS stating a 24 month lookback rule re: determining HCE benefits for the UCL, where is there a cite on that? I imagine somewhere in the 404 regs.

Thanks

[SoCalActuary]

I have no direct cite in the 404 code or regs, but someone else might have one. But it is now consistent among the IRS speakers at recent conferences, including ASPPPPPPPA.

Marty Pippin, Jim Holland (reluctantly), and other IRS policy people are making clear statements that action of the employer to increase HCE benefits is an amendment affected by this rule, whether it was the start of a new plan or the change of an existing one.

Don't fret though, because you still get the normal deduction rules for new plans during the first three years.

You just don't get to deduct 150% of current liability for that portion of CL that reflects benefit improvements for HCEs.

[flosfur]

A thought occurred to me. And then I determined that my thought is not going to fly. However, I am curious to hear the feedback I get regarding my thought.

.................

What about contributing $50,000 to the DB plan (to meet minimum) and $50,000 to the DC plan (I suppose we certainly can't go above 25% of compensation)? This results in a deduction of $100,000 which complies with the UCL limit. The obvious benefit to the employer is thus to have more deduction opportunities in the DB plan by only putting in 50k in the first year.

I like the idea, but unfortunately, I realize it won't make it past the tight defense of this post.

Thanks.

Notwithstanding, how one can have a $50k minimum required with an unfunded RPA of $100k for a new or old plan:

The DB/DC combo deduction part of the section of 404 says [s404(a)(7)] (rephrased): the deduction is limited to 25% of eligible comps or the "minimum required contribution". So the deduction limit related to the unfunded CL limit doesn't even come into play.

[AndyH]

the deduction limit related to the unfunded CL limit doesn't even come into play.

That is not correct. The deduction limit is not less than 100% of current liability even under 404(a)(7). That is part of "the minimum required contribution".