deductibility of Contributions

[Dougsbpc]

I know this has been discussed before but not sure if it has been completely resolved.

Suppose you have a partnership of three doctors who sponsor a money purchase plan through 2006. They terminate the plan on December 31, 2006 but do not distribute benefits until mid 2007. Furthermore suppose they adopt a DB plan effective 1/1/2007 for calander year 2007. Does the 31% limit apply in 2007?

In reading 404(a)(7)© it seems that if any one participant is a beneficiary in a DB and DC the 31% combined limit applies. Even though none of them will receive contributions in the MPP in 2007, it appears that just because they have an account balance in 2007, they are considered beneficiaries and therefore the combined 31% limit applies.

does anyone disagree with this?

[WDIK]

Please pardon me if I'm missing something, but if there are no contributions being made to the money purchase plan, why is the "31% limit" even an issue? The defined benefit contribuion is deductible.

[Dougsbpc]

That is the question.

It sure seems logical that if there were no MPP contribution in 2007 there should be no combined limit. However, 404(a)(7)© indicates there is no combined limit if no participant is a beneficiary in both plans. I would think beneficiary means any participant with an accrued benefit or account balance.

If they dont distribute benefits until 2007, all would have account balances in the MPP in 2007 and be considered beneficiaries in both plans.

[Dougsbpc]

Actually, that was a bad example.

Suppose the same group terminated their MPP distributed benefits in mid 2007, adopted a DB for two of the doctors and adopted a 401(k) plan for the other doctor.

[WDIK]

Will contributions other than salary deferrals be made to the 401(k) plan?

[Effen]

"You spin me right round baby, right round, like a record baby, round, round, round, round"

Search the DB board for a lot of discussion about this circular topic. Personally, I don't think you "benefit" unless you actually receive an annual addition during the year. I recognize others don't share this opinion.

[Dougsbpc]

Thanks for all the replies.

Isnt that the truth, round and round we go.

In this case the younger doctor will have the 401(k) and employer contributions will be made.

[Blinky the 3-eyed Fish]

If your DC contribution doesn't exceed 6% of salary, 404(a)(7) doesn't apply. It doesn't matter if someone is considered a beneficiary or not. Doug, your first example had no contributions to the MP plan. WDIK's response is correct. In your second example, will contributions be over 6% of salary?

[ak2ary]

Last opinion I heard from Jim Holland was that inactive participants in DB plans are considered participating for 404(a)(7) purposes because any contribution made to the db enhances the security of their benefit. Inactive DC particcipants are not considered as participating for 404(a)(7)

That being said, unless you have a DC contribution in excess of 6% of pay 404(a)(7) does not apply

[Dougsbpc]

Thanks again for all the replies.

In this case two of the three doctors could really benefit from a DB as they are in their 50's and the other doctor is 33 and really wants to direct his own investments. This is a perfect situation for a DB that covers the two elders and excludes the youngster. Meanwhile the 401(k) would exclude the two elders. Should work fine as they have no employees and are all HCE and Key (33 1/3% ownership each).

The problem is they currently have a 20% MPP that covers all of them. They will soon terminate the MPP (by 12/31/06) but will not distribute benefits until about March 2007. So in 2007 no contribution would be made to the MPP. Meanwhile, they want to adopt a DB for the two docs and a 401(k) for the younger doc. So in 2007 no participant will benefit in a DB and a DC. That is unless just having an account balance in the MPP during the same year means the two older docs are deemed to benefit in a DB and DC. If that were the case then maybe there would be a 31% limit between the new DB and new 401(k).

However, if Jim Holland indicated that inactive DC participants are not considered participants for 404(a)(7), then we should not have a problem.