404(a)(7) Limit Applicability

[bdeancpa]

I have a DB plan that has two participants, both HCE's. In addition there is a 401(k) plan that covers 3 particpants, the two in the DB plan plus another HCE. In the past, the two participants in the DB plan have fully funded their required DB contribution (whcih exceeded 25% of pay) and put the maximum 401(k) deferrals in the 401(k) plan. The newest HCE is eligible for the 401(k) plan for the current year, but not the DB plan. The DB contribution for the two other HCE's does exceed 25% of all 3 HCE's compensation.

So, here is my question. Since the new HCE is not in the DB plan, can we make a deductible DC contribution for him. My initial thought was NO, since we have people covered by both plans, the plans would be subject to the 404(a)(7) limit.

I then read a paragraph in the ERISA Outline Book that indicated there must be an embloyee that is a "beneficiary" under each plan in order for the 404(a)(7) limit to apply. The author's thought was that it is reasonable to use the "benefiting" definition under the Sec. 410(b) coverage rules to determin who is a "beneficiary" under the plan (absent IRS guidance to the contrary). He goes on to say "an employee must share in the allocation of an employer contribution ... to be treated as benefiting under a defined contribution plan".

Since the two older HCE's get no employer contribution under the DC plan, only deferrals, would you think a DC contribution to the other HCE would be deductible? Thanks in advance for your help.

[Guest saeissler]

All 3 employees are considered as benefiting under the 401(k) plan. The benefiting rules you are referring to go back to 410(b) coverage which tests the employer contributions separately from 401(k) deferrals. But the participants are considered as benefiting under the 401(k) arrangement and so are beneficiaries of the plan.

[AndyH]

But it sounds to me like you could still contribute 6% (employer contribution) to anyone eligible for the dc plan under 404(a)(7).

[Mike Preston]

Explain to me again why a contribution to the DC plan on behalf of the individual who is not participating in the DB plan would subject this employer to 404a7?

[AndyH]

Your point makes sense, but .....

doesn't it depend upon which speaker was speaking on which webbbbcast and what stage the moon was in at a particular conference?

Yesterday's webcast has many slides on this issue and I for one never heard any definitive answer on this or other questions. But maybe others did???

Pippins did say yesterday that he thinks that eligibility for k deferrals equates to allowable use of that compensation for PS 404 purposes, and if you take that position might not that treatment extend to 404(a)(7)?

[Guest saeissler]

I thought the original question was whether the plans were subject to 404(a)(7) before any contributions to the third HCE, not whether a contribution to the third HCE would make the plan subject to 404(a)(7)? The plans are subject to 404(a)(7) because there are employees who are beneficiaries in both the DB and DC plans. The original HCEs make deferrals in the DC plan and are covered in the DB plan. But the new HCE can still get a 6% contribution under the DC plan and can make deferrals. And as far as what happens when the third HCE gets 7%, it's pretty clear that it isn't clear.....

[Mike Preston]

I think that this particular issue is pretty clear and has been clarified for a number of years. It is threads like this one, which call into question the issue as if nothing has been discussed before, that lay the groundwork for future confusion. The original post said it all. Sal's description is quite clear. I just don't see where 404a7 has any bearing on the determination of maximum deductible contribution when you have a set of participants in the DB plan and in the 401(k) plan and another set of participants in the DC plan and in the 401(k) plan. There is no overlap between the DB and the DC plan; overlap in the 401(k) plan is irrelevant.

If there is any confusion at all it is because the eligibility for the non-401(k) portion of the DC plan doesn't appear to preclude those who are participating in the DB plan from being eligible for employer contributions in the DC plan. I agree that it would be better plan design to have it specified in this manner. But I don't think it is fatal not to have done so because if they don't get an allocation of employer monies (contributions or forfeitures) they most assuredly are not benefitting in the 410(b) sense of the word and, per Sal's writeup, are therefore not "beneficiaries" in the 404a7 sense fo the word, either.

[AndyH]

Mike, with all due respect I must disagree.

It is the government's fault that simple matters such as these are not clear to everyone. Doesn't this question go back to 1965 or so? Where is the official guidance?

I have read just about every relevant thread on this board and I still find that respectable opinions differ. And yesterday's webcast, which included an authoritative goverment official, kicked up the dust again in my view.

And, yes, Sal's book gives a "reasonable" interpretation. He does not, however, state that it reflects official or even strong unofficial guidance.

Where is that? In the pipeline, apparently, after 40 something years.

p.s. Now how do we calculate an MVAR this year? Oh, I guess it hasn't been 40 years yet

[david rigby]

Hey Andy, good point.

Do you think the IRS will ever finalize the proposed 412 regs? 24 years old!

[Belgarath]

My 2 cents worth...

"I have a DB plan that has two participants, both HCE's. In addition there is a 401(k) plan that covers 3 particpants, the two in the DB plan plus another HCE. In the past, the two participants in the DB plan have fully funded their required DB contribution (whcih exceeded 25% of pay) and put the maximum 401(k) deferrals in the 401(k) plan. The newest HCE is eligible for the 401(k) plan for the current year, but not the DB plan. The DB contribution for the two other HCE's does exceed 25% of all 3 HCE's compensation."

I think that at this point, the "combined deduction" limit is irrelevant, since elective deferral only plans are ignored under 404(a)(7)©(ii).

Now the third employee, who is not eligible under the DB plan, is going to get a discretionary employer contribution under the DC plan. It seems like a bit of a stretch to assert that this DC contribution is nondeductible under 404(a)(7)©.

Do you just use the disaggregation logic to assert that that the deferrals only are a separate "plan" and that therefore, in this situation, there is no overlapping participation between the DC plan and the DB plan?

And since of course we Bosox fans stick together, I must also agree with Andy that the lack of guidance is somewhat distressing. There is a lot of confusion on this issue, rightly or wrongly, with very bright and experienced people having very definite and yet opposing opinions. It really doesn't seem like it would be too challenging for the IRS to provide specific guidance, and clear this up once and for all.