PPA 2006 - Combo DB DC Plan Deductions

[Gary]

In reading the Act it appears to me that if a DB plan is covered by the PBGC, it appears that the combined limit will not be applicable. Or to put it another way the DB plan would not be factored in the 25% deduction limit for the DC plan.

Assuming the above is correct, my question is "When does this become effective?" Is it for plan years beginning in 2007, 2008?

Thanks.

[Dougsbpc]

Yes. That is correct.

This is applicable beginning in 2008.

[John Feldt ERPA CPC QPA]

"Years" beginning after 12/31/2007. PPA section 801:

PPA 801 (b) Exception From Limitation on Deduction Where Combination of Defined Contribution and Defined Benefit Plans- Section 404(a)(7)© of such Code, as amended by this Act, is amended by adding at the end the following new clause:

`(iv) GUARANTEED PLANS- In applying this paragraph, any single-employer plan covered under section 4021 of the Employee Retirement Income Security Act of 1974 shall not be taken into account.'.

...

(e) Effective Dates-

(1) IN GENERAL- Except as provided in paragraph (2), the amendments made by this section shall apply to years beginning after December 31, 2007.

http://fuguerre.googlepages.com/PPA.htm#ppa801

Also, as you may be aware, you can currently ignore 404(a)(7) if the overall Employer contribution in the DC plan does not exceed 6% of compensation, regardless of whether or not the plan is subject to PBGC, that's in 803(a).

[himt4]

"Also, as you may be aware, you can currently ignore 404(a)(7) if the overall Employer contribution in the DC plan does not exceed 6% of compensation"

I have heard the above rule phrased that way and I have heard it phrased this way "when applying the 25% combined limit, you can ignore the first 6% in the DC plan". The phrasing at the top seems to have an "if cliff", as if it is saying that if you go over 6% in the DC plan, then you are back to having a 25% cominbed limit.

So please confirm: If the DC contribution for 2006 is 10%, will a required 21% contribution to a DB plan be deductible?

[rcline46]

Actually you have it backward. The DB contribution, regardless of % of pay is deductible. The question is how much of the DC contribution is deductible.

In your example, would 4% or 6% be deductible. In no case would the 10% be deductible. Most believe the law says that the 6% would be deductible. Some more conservative people say only 4%. Until the IRS clarifies the rule in writing, you can make up your own mind.

[SoCalActuary]

The law is even more subtle then that. If the DC contribution was not above 6%, you could deduct the maximum DB limit, regardless of the DB minimum.

Once you get above 6% DC contribution and your deductions would exceed 25%, you only get a deduction for the DB minimum required to avoid a funding deficiency.

This subject was covered at both the COPA and ASPPA sessions, but we still don't have written IRS guidance that is definitive. If possible, try to get taped responses or written info from the ASPPA session before you offer a firm opinion.

[AndyH]

I understand it as SoCal stated, but I would also add that the maximum DB deduction limit itself is altered if the 6% becomes 6.000001% because the 150% of projected unfunded current liability reverts to 100%. Anybody willing to agree or disagree?

[himt4]

Okay, I was just talking to someone who says that in my 21% DB contrib, 10% DC contrib example, that the full 31% is deductible. He gave me this as the backup. From a 9/14/06 "ASPPA asap", it says...

"while further guidance is still needed, the common interpretation is that if the...DC deduction exceeds 6%, only the contribution in excess of 6% of pay will be counted toward the limit under 404(a)(7)"

So, if we agree the normal limit under 404(a)(7) for this combo is 25%, then I have 21% in the DB and 4% in the DC (since that is the amount that exceeds 6%) and my total of 25% does nto exceed the limit. So, nothing exceeds the limit, not the exempt 6% and not the other 25%, so the full 31% is deductible.

So, was there further guidance after that "ASSPA asap"? can you point me to it becauce it seems like everyone else disagrees with the 31% being deductible.

Also, sometimes I have trouble interpreting what some of you are saying. From rcline46's post, I can see that he thinks that the most common intrepretion is that 27% is deductible in my example (21 + 6).

I think that socalactuary and andyh are saying that they think only the DB's 21% is deductible. Can you two confirm that I have your interpretation correct? (to keep thinks simple and on point, assume that the minimum required 21% for the DB is greater than 100% or 150% of the unfunded current liability, so that no possible complications are added to the 25% limit discussion)

[John Feldt ERPA CPC QPA]

AndyH and SoCal - I agree, well, that's the approach we have taken so far, absent any written guidance to the contrary.

[AndyH]

If the DB is 21% and the DC is 7% then I think that clearly at least 4% is deductible on the DC side.

I think it is unresolved whether the additional 2% (to get to 6%) DC contribution is deductible although most informed comments that I have heard or read say the eventual answer will be that 6% is deductible. But I would not rely on that until there is further guidance.

[John Feldt ERPA CPC QPA]

I agree with AndyH except that I would go for it with the 6% and deduct 6% in the DC, not just 4%, even though it is not entirely clear yet, I'd take the risk.

[himt4]

No one seems to be supporting the interpration that I cited in the "ASSPA asap" that seems to say you can deduct 21% in the DB and 10% in the DC in the example I gave. I just googled "DB DC Combo 31%" and interestingly I found a 11/28/06 post in this message board where J4FKBC was giving this interpretion...

- - -

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.

- - -

This supports the full 31% deduction in my example.

J4FKBC, it looks like that you now no longer support this interpretation. What did you see that changed your mind? can you point me to it?

[John Feldt ERPA CPC QPA]

OK. Here's the quote:

"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."

So, I need help seeing how this quote shows a change of position from my comment above, I really didn't intend a change. When I read the PPA, I see the DB minimum as deductible first, then I look to see how much room is left for deducting the Employer DC money, with the opinion that I can always deduct the first 6%.

Suppose the DB minimum is 15% of eligible compensation. They can put a contribution of up to 10% Employer money in the DC plan, but any Employer DC money above that is not deductible - I think that's what I agreed to above. Perhaps this is being confused with this example:

If the DB minimum was 23% of eligible compensation and if the DC plan wants to put in Employer money of 6% of eligible compensation then are ok, but any Employer DC money above that 6% might not deductible - staying under the 6% is what I call the conservative approach here.

If the DB minimum was 23% of eligible compensation and if the DC plan wants to put in Employer money of 8% of eligible compensation then I think they are ok, but any Employer DC money above that 8% is not deductible - this is what I call the less conservative approach, and guidance may clear this up some day.

[himt4]

Ok J4FKBC, here's how I am confused...

in my example shown above with a 21% DB contrib and a 10% DC contrib, it seems like this full 31% would be deductible from the interpretation that you just gave.

However, ANDYH interpreted that only 4% of the the DC was clearly deductible although he says that perhaps you could deduct 6% if you wanted to take the risk.

You then agreed with ANDYH but said that you would take the risk with the 6%. Neither of you supported the deduction of the full 10% in the DC. Which i believe is deductible under your interpretion: 21% in DB plus 4% in the DC (the amount over 6%) with the first 6% in the DC also being deductible.

Sorry that I am such an example guy, but it would help me a lot if you could give me your answer to my specific example: 21% in DB, 10% in DC. How much is deductible? how much is subject to an excise tax?

[John Feldt ERPA CPC QPA]

OK, now I see what I've done. I understand where I have confused the issue.

21% in DB, 10% in DC. How much is deductible?

Alright, when applying 404(a)(7), the PPA states "this paragraph shall only apply to the extent that such contributions exceed 6 percent of the compensation"

I want to stress "to the extent" - it must mean something, but guidance is pending that might clarify it. So, I take the somewhat less conservative approach (pending guidance), that I can ignore the first 6% (thus deduct it) and then only the rest of the DC money counts toward the 25% limit, because only the rest of the DC money is considered to be part of "to the extent".

So, in your example, I would deduct the full 31%. We don't have any clients yet in this exact scenario (the DC clients with DBs have over 25% deductions for the DB), so I appreciate your persistence (and patience) with me.

I'll add an edit to my previous post (above) to clarify the conservative vs less conservative approach.

-Thanks!

[AndyH]

I definitely do not agree. I think that if your deduction totals more than 25%, then the DC deduction is limited to 6% in all cases.

[John Feldt ERPA CPC QPA]

That's ok, we'll disagree for now. If any of our clients end up in this situation, we'll certainly explain the conservative approach vs the less conservative approach and see what their CPA advises based on this language.

[himt4]

Thanks AndyH and J4fkbc for your answers. If possible, I would appreciate Socalactuary, Blinkys, and anyone elses answer to my 21%DB/10%DC deductibility question. How much do you think is deductible.

I want to see if I can ascertain the current industry conventional wisdom for issue.

[Effen]

himt4 - No one can give you a definitive answer, because no one knows until the IRS tells us. As a consultant, you need to explain to your client that any combination above 25% involves some risk.

[himt4]

yep, I know that there is no definitive answer yet, but usually there emerges (what I am calling) an industry conventional wisdom.

(It's like that great 2006 message board post last year about being an HCE in 2006. Some felt strongly that the regulations supported the view that you are HCE in 2006 if you earned over 100,000 in 2005. However, the Industry conventional wisdom is that you are HCE in 2006 if you earned over 95,000 in 2005. )

[John Feldt ERPA CPC QPA]

Yes, I read that - let's not start that again!

[AndyH]

There was an ASPPA webcast on the subject if you are interested which I think would be consistent with my comments. But I would caution if you buy it that the government guest was not on top of his game during the webcast (hey we all have off days).

[himt4]

AndyH, I think you are talking about the webcast "tax deductions after PPA: Cruisin on the 404". That's the webcast that my guy got the idea that the 31% would be deductible in the 21%,10% example, along with the "ASPPA asap" that I mentioned earlier. I dont have the transcript of that webcast, but I do have copies of the "slides". Slide #47 says that if the DC plan exceeds 6%, then 404(a)(7) applies and that you only count contributions in excess of 6%.

This seems to be saying to me that you only count contributions in excess of 6% when applying the 25% limit of 404(a)(7), which would support the 31% deductibility of the 21%/10% example. i.e you dont exceed 25% limit because 21 +(10-6) =25.

[AndyH]

That just does not make sense to me. If and only if the DC exceeds 6% then 404(a)(7) applies. The only thing you count is whether or not you lose the entire DC deduction or just the amount exceeding 6%. Joan suggested the latter. The IRS rep hemmed and hawed and seemed to agree that made sense but did not commit to an answer because there is none.

I never heard any consideration of a DC deduction exceeding 6%.

Also, this is consistent with prior law whereby certain DC contributions up to 6% were exempt from an excise penalty.

[himt4]

Someone just pointed me to Workshop#19 of the 10/22/06-10/25/06 ASPPA Conference.

- COMMON PLAN DESIGNS FOR MEDICAL PRACTICES— Norman Levinrad, FSPA, Summit Benefit & Actuarial Services-

They told me there was a question about this issue at the workshop.

I was able to find it in on the audio cd. At minute 42, the question comes up. Norman answers and then Joan fine tunes his answer by saying "the profit sharing contributions in excess of 6% count against your 25% limit, so effectively you have a 31% limit".

From this it is clear to me that Joan is siding with the 31% deduction for the 21%DB and 10%PS example

[goldtpa]

If a DB plan is covered by the PBGC, then the combined limit will not be applicable starting in 2008. It seems to me that the only people who would love to have a db and a dc would be self employed people, Doctors, etc. However they would not be covered by the PBGC.

Do you think that they could voluntarily submit premiums to the PBGC in order to fully fund both?

[John Feldt ERPA CPC QPA]

goldtpa: Nope. I think it was at the Annual ASPPA conference where the IRS said no.

[AndyH]

himt4, sorry but I feel the need to repeat that you are misinterpreting the rule, IMHO. I cannot find any summary by anybody that supports your interpretation, including that ASPPA session outline that you are referencing And while I did not hear the tape your conclusion does not support the comment IMHO.

On the contrary, page 14 of Joan's ASPPA webcast outline has some bullets which include:

"If DC contributions exceed 6%, then IRC 404(a)(7) comes into play."

It does not say "....exceed 6% and the combined contribution exceeds 25%"

I assert that the act of contributing 6.0001% to a DC plan with an overlapped DB plan causes the deduction limit to be the greater of the DB minimum or 25% of pay, not 31% of pay.

[himt4]

Again, I must preface that it is not my goal here to interpret this rule. We all know that this rule and so many others in our line of work are not clear and that we all have our different interpretations. What I have been looking into lately is how our “industry leaders” are interpreting this law. And I’ve presented my research here in this forum to share. I really really think I’ve gotten it right when I say that it is Joan’s interpretation (or at least it was at the time of the ASPPA webcast and ASPPA conference) that if more than 6% is contributed to a PS plan that the deduction limit is (DB% + (PS%-6%))= 25%, plus the “free” first 6% in the PS plan for a total 31% limit. Listen to ASSPA conference I previously posted. I am not alone in this. I’ve asked people who atteneded the ASPPA conferences and webcasts. They tell me that ASPPA’s interpretation is this 31% limit, and they have pointed me to the source material that I shared with you. (And yes, again, everyone explains that this issue is not clear and that we’re talking about interpretation).

I am glad that this thread was re-continued at this time, because, coincidentally, on Friday I listened to a taping of a 12/6/06 ASSPA webcast entitled “cash balance Plans Post PPA: Are they right for your client?” presented by Thomas J. Finnegan.

slide 41 discusses the DB/DC combo and it says that “Appears that if the DC contribution exceeds 6%, only the excess would count toward the limit” and then he provides the example “ Example: if the DC contribution was 8%, only 2% would count toward the 404(a)(7) limit”

Later in the webcast he does an example of a cash balance/ DC combo. On slide 90 he writes “in fact, since the DB contribution is less than 25% of pay, it appears that the DC contribution could be increased such that DB + (DC – 6%) = 25%”

Believe me, there is no way I am misinterpreting his interpretation of this rule.

AndyH. I know that you interpret this rule differently and your interpretation could very well end up to be the right one when further guidance is provided. However, I think your personal interpretation is clouding your ability to accept that not only can the rule be interpreted for a 21%DB/10%DC deduction, but that in fact many of the ASPPA industry leaders are interpreting it this way.

[AndyH]

Ok, thanks for the info. Your description of Tom's comments does seem clear. Tom is on these boards, so maybe he would chime in.

I did not reach the same conclusion that you had from your description of Joan's comments, however. There is more than one way to interpret those comments.

I would also welcome "published" interpretations; I had just not heard or read any that I thought support a 21%DB /10% DC situation.

[himt4]

In my 8th post of this thread (himt4 Jan 18 2007, 12:26 PM) I first bring to everyone's attention a 9/14/2006 ASPPA asap. I was just looking at that asap again, and I now see that it was written by Thomas J. Finnegan. So, yes, if Tom is on these boards, perhaps he can provide some comments here.

[AndyH]

ok, Tom's keeping quiet-probably wants to preserve his "handle" and it is too hard to have a second one so maybe we should start a contest:

...could it be ........ _____________??

[ak2ary]

ok, Tom's keeping quiet-probably wants to preserve his "handle" and it is too hard to have a second one so maybe we should start a contest:

...could it be ........ _____________??

"ak2ary?"....

OK OK here's the deal. The ASPPA ASAP, The webcast I did, the webcast Joan did, Norman's presentation, Brain Graff's presentations, the interpretation of APPA GAC, the interpretation of staffers intimately involved in the debate before PPA was passed, the initial opinion proffered by the IRS after PPA all said the same thing...

The entire 31% is deductible..

Here's the rub... the IRS is not publicly giving that opinion anymore, but have not publicly disagreed with it either. Jim Holland at ASPPA annual said that he sees the 31% arguement and we have to wait to see how it comes out. I expect it will come out favorably toward 31%, since it was apparently congressional intent,

as was mentioned by a congressional staffer from the podium at ASPPA annual

[ak2ary]

But, having said that, I don't let clients take deductions based on my suspicions and am suggesting to my firm's clients who might take advantage of this to "wait and see"

[AndyH]

See, I kept your secret ........

So, just to be clear, "convention wisdom" thinks that 21% DB + 10% DC might be ok, not just 25+6?

Thank you.

p.s. Now who wants to out Blinky?

[ak2ary]

That's the thought and, as of this weekend, people more knowlegeable than I thought it would, more likely than not, work out with the higher deductions. Having said that...I'd still wait and see

[himt4]

I am not very up on how this process works. Is there a date set where the IRS issues a statement giving the official interpretation of this rule? When is this going to happen?

[ak2ary]

Sorry..to be clear...IMHO 21 + 10 should be ok and supposedly represents congressional intent

IRS expects to issue guidance..is aware of the clamoring for same...

who knows when?!?!

[himt4]

primarily adding a post here just to send this thread into the exclusive "1000 views club".

But since I'm here I'll add a comment.

Isnt this like "if a tree falls in the woods..."

I mean, If a law comes out with the intention to give combo plans a 31% deduction, but everyone is too scared to take advantage of it, then was there really a 31% deuction law for 2006?

The clients who send in their data now are the ones who want to get everything finished early. When you tell them that you can get them a 31% deduction but it contains some risk, they say they dont want to risk it and they dont want to wait for some possible future IRS statement. They say just take 25% and lets finish the 2006 year up.

[ak2ary]

I heard today that the IRS is finishing what was described as "deduction guidance" to be released "soon"...those that can't wait have 25% those that can wait may have more...but yes..there is a limit to all clients' patience

[John Feldt ERPA CPC QPA]

I think Notice 2007-28 confirms that the 31% would be deductible. See Q&A #8.

Make sure the DB contribution is only for mimimum funding and watch out for "eligible compensation".