Non-Profit equals No 404 Limit ?

[JAY21]

Does a non-profit corporation that sponsors a DB plan have a 404 limit ? I'm thinking not, in which case couldn't they fund say 1 million dollars for a Key employee plus 1 NHCE where otherwise they would be restricted to less if a for-profit entity ?. The normal 415 limits would apply, so I guess they essentially are just advance funding the plan. Nothing in PPA 2006 changes this to my knowledge, assuming I'm correct in the first place. Any thoughts on this ?

[Mike Preston]

You are correct. Sort of. This is why a 403(b) and a 401(k)/PS can make soooooo much sense for a non-profit. Essentially, the 100% of pay 415 limit provides for a very large contribution.

But it isn't unlimited.

In the DB side, there are no immediate 415 limits to cause concern. But the IRS has two prongs with which to attack super-aggressive funding. The first is "exclusive benefits". Basically, if the contribution is deemed excessive the IRS can claim that the real purpose of the plan is something other than merely providing benefits. I don't know what else it might be, but that doesn't matter. If the primary purpose of the plan isn't to provide retirement benefits it is disqualified.

The other way the IRS can attack a large contribution is in the area of reasonable compensation. There are some cases on this you should be able to find. The IRS takes the position that reasonable compensation is measured against the sum of the actual compensation plus the deferred compensation. If 1 mil is going into the plan, basically all for a single HCE, that is going to cause a pretty big blip on the reasonable compensation side of things.

So, while you are right that 404 itself doesn't apply, that doesn't mean that a non-profit doesn't need to worry about how much money goes into a plan.

[Andy the Actuary]

Mr. Preston, while these IRS remedies exist, are you aware of any instances pertaining to DB plans sponsored by not-for-profit organizations where the IRS disqualified a plan because heavy contributions violated the exclusive benefit rule or if the IRS deemed compensation to be unreasonable. Are these simply remedies that the IRS might be employ if they were attacking the not-for-profit for other reasons? After all, didn't Al Capone go to jail because he had an overfunded DB (dollars burried) plan?

[Mike Preston]

Indeed they are theoretical. How many non-profits do you know that have put 1 mil into a plan for one HCE and one NHCE where the IRS has not challenged it? <g>

[Andy the Actuary]

I only know of not-for-profits that would love to have an angel hand them $1 million ! Those not-for-profits with which I have worked for the most part are dealing with how they are going to fund their frozen DB plans.

[AndyH]

Jay, if the non profit has ever paid UBTI the IRS treats them like a for-profit for purposes of excise taxes on non deductible contributions and related rules.

[JAY21]

Thanks for the input from all.