Deductions under PPA

[thepensionmaven]

I'm reviewing a proposal for a DB/DC combo for '06.

Client has a profit sharing plan and is thinking about adopting a DB relatively soon.

According to my understanding of PPA, any employER profit sharing contribution in excess of 6% of eligible payroll is not deductible.

Am I correct?

Thanks.

[Effen]

Lots of discussions about this on the defined benefit board that you might want to check out.

At this point I believe we are awaiting Regs to determine exactly what this provision means.

[AndyH]

My take is that it would be deductible IFF the combined contribution was 25% of pay or less; otherwise not. Anybody disagree?

[John Feldt ERPA CPC QPA]

For clients where at least one participant is a "beneficiary" in both plans, we are taking this approach:

1. the minimum required contribution to the DB plan is deductible, plus

2. the employee deferrals in the 401(k) are ignored (i.e. deducted), plus

3. contributions up to the first 6% of eligible compensation for ER contributions in the DC plan (match, nonelective, etc.) are also ignored (thus deductible), plus

4. anything above 6% in the DC is deductible but only up to the point where DB + (the DC% above 6%) is equal to or less than 25% of elig comp

For example, if the DB minimum was 18% of pay, and they somehow goofed by contributing 15% of pay to the DC plan, then the DB contibution is deductible, plus 6% of DC is ignored for purposes of 404(a)(7) under PPA 2006 (thus it's deductible), AND of the remaining 9% (DC money) only the 7% portion is deducted, leaving 2% that cannot be deducted. This becomes a 31% deduction plus a 2% nondeductible contribution.

1. 18% minimum DB - deductible

2. x% deferrals DC - ignorable (deducted)

3. 6% ignorable DC - ignored (deductible)

4. 7% considered DC - deductible (DB + DC <= 25%)

5. 2% considered DC - nondeductible - the DB + this DC portion now exceeds 25%

In this example, if they had contributed only 13% to the DC, our approach would be to deduct it all, DB and DC.

Numbers 3 and 4 might be in question, of course, but that is our approach for today.

By "beneficiary" we take the approach that the employee is benefitting (receiving an accrual / receiving an allocation).

[AndyH]

I think we agree except I did not take a position on the 6% DC deductibility when the DC exceeds 6%-lose all or lose some? Open question I think.

Then there are the details such as what is the minimum DB - i.e. include 150% RPA unfunded? 100%? Or just the 412 minimum. I think the 150% reverts to 100% once the DC exceeds 6%.

[rcline46]

We interpret the law this way:

1. DB plan deduction comes first, based on 412 MINIMUM

2. DB plan may optionally deduct up to 150% CL.

3. If 1 above exceeds 25% of pay, you may ALSO deduct up to 6% in a DC plan

4. If 1 above is 19% or more you can deduct up to 6% in a DC plan

5. If 1 above is under 19%, you can deduct the difference of 25% and the DB %.

6. If you are using 2 above you get the OLD rule you can deduct up to 25% minus the DB which means you may not be able to deduct ANY DC.

This would be the conservative approach until we get guidance.

[AndyH]

Conservative? Has someone stolen rcline46's identity? Shocking!