(100%/150% CL minus assets) Deduction Limit

[flosfur]

What is the IRS position on the (100%/150% CL minus assets) Deduction Limit for a new plan?

I heard some murmurings that for this purpose the IRS considers adoption of a new plan as an amendment increasing the benefits (going from zero benefit to some benefit) and therefore this special dedcution does not apply?

[David MacLennan]

The IRS (finally) caved on this. See Q & A-5 of Notice 2007-28. New plan is not treated as a plan amendment if there was no other plan covering HCE in the last 2 years.

[Penman2006]

Am I correct then that a one-person business with no prior DB plan can start a DB plan and contribute up to the 150% limit plus start a DC plan and do a 6% PS and a maximum 401(k) deferral? (Keeping in mind that you need to keep an eye on excess assets for 415 purposes, and there can be a trap for a sole prop.'s "comp" wrt the 150% limit.)

[Mike Preston]

Yes.

[flosfur]

The IRS (finally) caved on this. See Q & A-5 of Notice 2007-28. New plan is not treated as a plan amendment if there was no other plan covering HCE in the last 2 years.

Thank you.

[Penman2006]

If you have a sole proprietor with a very large Schedule C (say $1,000,000), and you set up DB and a 401(k)/PS plans, is the "comp" used tp determine the DB contribution $225,000 or $225,000 minus 6% PS = $211,500.

[John Feldt ERPA CPC QPA]

If the true final net earned income (after business expenses, after reduction for DB and DC contributions, after 1/2 SE tax, etc) ends up at $225,000 or above, then your answer is $225,000 for 2007, not 211,500.

[John Feldt ERPA CPC QPA]

Wait, wait wait. Hold on.

If you're looking at the compensation for 2007 alone, then the answer I have above stands.

If you're looking at average compensation for accrual of benefits, then the 415 average compensation can't exceed:

( 210,000 + 220,000 + 225,000 ) / 3 = $218,333.33

[tymesup]

If you have a sole proprietor with a very large Schedule C (say $1,000,000), and you set up DB and a 401(k)/PS plans, is the "comp" used tp determine the DB contribution $225,000 or $225,000 minus 6% PS = $211,500.

Where did the "6% PS" come from?

[SoCalActuary]

From profits, not as a reduction to 401(a)(17) compensation.

For a good example of this calculation, see the IRS publication 560 on small business pension plans. It shows that the 401(a)(17) adjustments occur after all deductions are applied except 401(k) deferrals (which are ignored for everything except 415 limits).

[flosfur]

The IRS (finally) caved on this. See Q & A-5 of Notice 2007-28. New plan is not treated as a plan amendment if there was no other plan covering HCE in the last 2 years.

Just want to point out that Q&A 5 says if there was no other "DB plan" and not "any other plan" i.e. it is ok to have been covered in a DC/401k plan.