A Twist on the DB/DC Combined Limit

[Guest erisafried]

Apologies if this has been asked and answered already...

I am going to avoid wading into the morass created by Mr. Holland and pose what I hope to be a simpler question about 404(a)(7), as amended by the PPA.

We know that the PPA modified the combined plan deductability limit to exclude from consideration employer contributions to DC plans that are less than 6% of compensation. The question is this: for purposes of determining the "25%-of-what" question, do you take into account only compensation earned by participants in the DB plan or can you take into account compensation earned by participants in the DC plan as well (to the extent they are not already picked up under the DB plan)? If the under-6% employer contribution was not excluded from consideration, I think the answer would be a fairly clear "yes" -- comp paid to beneficiaries under both "plans" would be taken into account. If a participant in the DC plan otherwise "benefits" during a particular year, it seems like the comp paid to him/her would still be picked up for purposes of the 25% limit, which could have the effect of juicing up the DB plan contribution.

I have heard that some IRS folks have informally agreed with the idea that you still count comp for participants benefiting under both the DB and DC plans even if the DC plan is excluded from consideration. Since I haven't heard this straight from the horse's mouth myself, I wondered if (1) anyone had a thought about this issue generally; and/or (2) anyone has heard one of the IRS folks expanding on this point at a conference, etc.

Thanks!

[Blinky the 3-eyed Fish]

Keep in mind the 25% limit still references employer contributions to both plans. You definitely count compensation for those that benefit under either plan.

[Guest erisafried]

That made sense to me too, but the actuary (big national shop) for the DB plan served the question up as if its answer was unclear thanks to Notice 2007-28. That's what I thought too at first, but now I am thinking that they are just being weenies by trying to pass the buck to yours truly.

Thanks for the sanity check. If anybody thinks differently, I'd be interested in hearing that too.

[SteveH]

Has anyone heard any rumblings about a resolution to Notice 2007-28? I guess I should ask what people's experience with this type of thing are. I've done a pretty good job of spending the past year positioning myself and my firm as the DB/DC solution.

I know IRS can't make law, just interpret it. We all seem to think that the IRS interpreted this one wrong. Is there any precedence for this type of scenario? I've never met Mr. Holland, but I find it highly unlikely we will see an, "Oops, my bad" letter any time soon.

Aer we all going to scramble around and try to terminate DB/DC combo plans or reduce the benefits so low that they are no longer desireable? Do we sit tight and assume that the IRS will come out with further guidance shortly? Do and of the Congress members that drafted the law make a clarification statement?

I have always dealt with fairly black and white areas of plan design and I didn't think this was a gray area. Now I am trying to determine how to deal with it. Common sense tells me that allowing the full DB contribution and 6% to a DC plan will be fine. The law seems to be very clear. None of us want to hang our neck out to try and prove that point though. I wold love to hear other people's thougts.

Lastly, anyone ever wonder if "people" at the IRS sit around and think, "Boy those ASPPA people are giving me a headache, I'm going to publish this Notice and turn their world upside down!" Why else would things that are so confusing go unanswered and things that seem clear and concise end up becoming muddied?

[John Feldt ERPA CPC QPA]

ttott, I've heard no rumblings, but if you haven't read ak2ary's ASPPA letter already, take a look at this, especially page 3 where he quotes Senator George Allen commenting to Senator Charles Grassley about this very issue.

http://www.asppa.org/pdf_files/0514_2007-27NoticeFIN.pdf

[SteveH]

I had already read the ASPPA response, but unfortunately that doesn't do anything in the meantime for the little people in the trenches.

I know I am having a pity party for myself today, but I feel like the entire last year I have been spouting DB/DC combo designs. Now I have to change my entire marketing message. Not to mention all of the open proposals I have out in the market place. Do you follow up and disclose that the plan design may no longer be valid? Do you put your head in the sand and hope no one wants to implement one of them? I had made a lot of progress meeting new financial advisors this year in anticipation of a busy year end. Now I don't feel like a client could adopt a plan with the 6% DC contribution unless we can keep the overall deduction under 25% of pay. That puts us right bnack to where we were last spring. Nothing new, nothing innovative. I end up being like all the other advisors talking about automatic enrollment and Roth 401(k).

Sorry, just venting a little. GRRRR... I feel a little better.

[Blinky the 3-eyed Fish]

Ttott, just out of curiousity, how is Notice 2007-28 affecting your proposals?

Before the notice, the IRS had stated all along that new plans were considered amendments for purposes of being able to fund 100% (now 150%) of UCL in small plans, so you wouldn't have been proposing that.

You do realize you can still fund 6% in the DC if your DB is limited to the greater of 25% of pay, the min contribution or 100% of UCL?

If anything, your proposals should be better as are the opportunities for DB/DC combos with PPA's passage.

What am I missing?

[John Feldt ERPA CPC QPA]

As far as the oustanding proposals, if any of them sign up then you'll have to communicate to them that the IRS re-wrote the law on their own doing, so the maximum is reduced, but even with that the results are still palatable. You realize that in 2008 the issue disappears for those handful of prospects who are subject to the PBGC (if that's any consolation). You still have something like this, or whatever your prospects' demographics would produce:

Plan Comparisons

Traditional 401(k) Profit Sharing Plan

HCE's: 110,000 NHCE's: 54,000

Cross-Tested Safe Harbor 401(k) Plan

HCE's: 120,000 NHCE's: 25,000

DB/DC Combo Cross-Tested Plan

HCE's: 240,000 NHCE's: 78,000

DB Stand Alone Plan

HCE's: 260,000 NHCE's: 115,000

DB with Cross-Tested Safe Harbor 401(k) Plan

HCE's: 355,000 NHCE's: 135,000

Put it in a stacked bar chart and you can illustrate the added value of PPA.

[Blinky the 3-eyed Fish]

As far as the oustanding proposals, if any of them sign up then you'll have to communicate to them that the IRS re-wrote the law on their own doing, so the maximum is reduced, but even with that the results are still palatable.

How is the maximum reduced for a new DB plan from what was available before Notice 2007-28? Please give an example.

[SoCalActuary]

A number of people believed that you could fund 150% CL + 6% DC contribution before the notice.

[Blinky the 3-eyed Fish]

On a new plan? Like I said, the IRS said over and over the adoption of the plan was considered an amendment for 404(a)(1)(D). While I certainly understand that mistake for existing plans, I have no sympathy if applied to a new plan.

Correction: instead of the word "mistake" above, I replace it with "proper interpretation of the code". IMHO, Notice 2007-28 is the mistake on this front.

[John Feldt ERPA CPC QPA]

Agreed.

[SteveH]

Well maybe I am completely misinformed and don't understand the thrust of the notice. Obviously with a new plan there isn't an unfunded liability. I have proposed plans where the sponsor funds 100% of the DB contribution plus 6% in a DC plan. I thought this was pretty clear cut that this was allowed.

Now I am confused. The impression I got was that the DB contribution is now limited if you make a DC contribution.

[Blinky the 3-eyed Fish]

Obviously with a new plan there isn't an unfunded liability.

Sure there is silly unless you didn't have an accrual during the year (and why do the plan if that was the case?). Remember the UCL calculation is considering benefits accrued through the end of the year.

Read Q&A-9 of the Notice. It should clarify for you what you are allowed to fund when DC contributions don't exceed 6% of pay.

By the way, what do you mean by "funds 100% of the DB contribution"?

[AndyH]

Obviously with a new plan there isn't an unfunded liability.

Sure there is silly unless you didn't have an accrual during the year (and why do the plan if that was the case?). Remember the UCL calculation is considering benefits accrued through the end of the year.

Read Q&A-9 of the Notice. It should clarify for you what you are allowed to fund when DC contributions don't exceed 6% of pay.

By the way, what do you mean by "funds 100% of the DB contribution"?

I submit that he who uses the term "clarify" and "Q&A-9" in the same paragraph has been in the sun and heat too long.

ttott, the red fish is of course correct despite his color. It sounds like you do need to brush up on how current liability affects the minimum and maximum db contributions. In short, without 404(a)(7) the db minimum becomes the greater of the old minimum or 150% of projected unfunded current liability EOY. With a <6% DC contribution covering the same people, 150% becomed 100%.

CL increases due to amendments affecting HCEs within the last 2.999 years need to be backed out (the 2.999 or 2 or 3 remains a bit foggy to me).

As to this proposal stuff, you should not IMHO have been quoting 150% of current liability as the proposal figures to begin with. If you were, you may have a problem. If not, I don't hear one. (This reinforces Blinky's point to his 7/9 6:53 comment)

Hope this helps.