DB/DC max combined limits (One Participant)

[Guest BuffaloT]

I am trying to find the simplest answer to the maximum contribution of a one person business - incorporated, that is making north of 1,000,000 per year.

He is establishing a DB plan this year and making the maximum contribution he can make into the plan is about 149,000 to provide the max benefit at age 62.

I understand that he can also use a solo 401k and defer 15,500 + 5,000 for a catch up since he is over 50.

QUESTION 1- Can he also fund up to 6% of compensation into a profit sharing portion of the solo 401k up to 29,500 (45,000 limit minus the 15,500 deferral= 29,500).

QUESTION 2- What is the 6% number based on in this total compensation- if he made 1,000,000 but he deferred 20,500 into the solo 401k plus contributed the 149,000 into the DB would his total compensation be 1,000,000 or 979,500 or 830,500.

QUESTION 3 - Is the 6% number essentially capping out at 491,667 of income (29,500/6%) - I guess this number would be clearer if # 2 were answered.

QUESTION 4 - Finally if an individual made enough money is he allowed to max out a DB plan and max out a 401k with a profit sharing up to 50,000 since he is over 50?

[SoCalActuary]

You need to understand that 401(a)(17) is part of this calculation.

$225,000 x 6% = $13,500 for beginning 2007 year

$220,000 x 6% = $13,200 for beginning 2006 year

[Guest BuffaloT]

You need to understand that 401(a)(17) is part of this calculation.

$225,000 x 6% = $13,500 for beginning 2007 year

$220,000 x 6% = $13,200 for beginning 2006 year

So does that mean the max limit is 20,500 + 13,500 + whatever a DB plan allow?

[SoCalActuary]

That's the essence of the new deduction rules.

[Andy the Actuary]

Question 1 - according to the new draconian IRS position stated in IRS Notice 2007-28, if you make any DC contribution other than elective deferrals, then 404(a)(7) applies, so that deduction would be limited to the greater of (a) 100% of DB UCL (assuming this is a non-replacement plan) or DB minimum or (b) 25% of compensation, where for this purpose, compensation is limited to $225,000. In short, Q&A 8 appears to say you could contribute the DB minimum and 6% to the DC. Since 25% of $225,000 exceeds your DB minimum, this answers your Question 3 that couldn't make deductible PS contributions to DC exceeding 6%, or for 2007, $13,500.

Question 2 - Compensation (net of deferrals) for computing DC would be limited to 401(a)(17). I.e., could contribute 6% of $225,000, not 6% of $1,000,000.

[AndyH]

He is establishing a DB plan this year and making the maximum contribution he can make into the plan is about 149,000 to provide the max benefit at age 62.

This all presumes that the $149,000 is either a 412 minimum or not more than 100% of current liability, right? In other words, you cannot contribute a dc contribution and more than the "minimum" to the DB where the minimum is the greater of 412 or 100% of CL and the combined total exceeds 25% of pay (per the Notice referenced).

Edit: lesser was edited to greater. OK Austin?

[Mike Preston]

Did you mean "lesser"?

[AndyH]

Good edit. Lesser was intended to be greater. I'd edit my post but then Austin Powers might attack me! Well I'll have to chance it.

[Mike Preston]

OK from my perspective. Nicely done, AAMOF. ;-)

[AndyH]

Had to look up AAMOF. I was concerned for a moment that it might be along the lines of FYIFV

[Mike Preston]

Nah. Besides, while that might be a nice acronym to steal into our domain, it refers to options.