Is it possible to fund maximum benefit in db/dc combo?

[Effen]

I am working on a new plan for 2008 and maybe I'm late for the parade, but I just realized that it seems to be impossible to fund the maximum lump sum benefit if I have a db/dc combo.

Assuming my db contribution will exceed 25% of payroll and its not covered by PBGC, if the ER makes a contribution into the a PS plan, the db deduction is restricted to the lesser of the min required contribution or the amount needed to bring the plan to 100% funded (not 150%).

Since maximum lump sums are probably based on 5.5%, and each of the current segment rates for funding are greater than 5.5%, my funding requirements will always be lower than the amount needed to accumulate a 5.5% lump sum. If I didn't have the PS contribution, I could overfund the db up to 150% and that would probably produce an adequate cushion. However, if I fund the PS plan, I loose that ability and therefore force my db plan to be underfunded at all times.

I won't ask if it makes sense, because I know it doesn't, but do you agree that it how it works? Basically, PPA either forces employers to underfund their db plans, or forces them not to make profit sharing contributions. And why is that good for the participants?

I think this problem will become less of a problem over time as 417(e) rates converge with funding rates, but in the mean time this seems like a real problem.

[AndyH]

As I understand it, you have no cushion for 2008 so you min equals your max (as things stand now), I would agree. But, after 2008 you have a 50% cushion on the accrued benefit (adjusted for salay scale) as long as your DC does not exceed 6% or your combined deduction does not exceed 31%.

So I see this as mostly a first year issue, as long as your DC is 6% or lower. But if your DC exceeds 6%, you have a problem in any year unless you are a PBGC "customer".

Just tell the client to go reinvent himself and join the PBGC crowd. (He may tell you to do something to yourself)

[mwyatt]

Know in a prior thread that someone (think Mike Preston) had alluded that the Technical Corrections Bill was possibly going to fix the problem w/ the cushion amount not applying to the Target Normal Cost, only the Funding Target. Anyone have any update or know of source of this observation? Have been holding off on any 2008 valuations until this is fixed/not fixed, as obviously has a significant impact on maximum funding levels.

[ak2ary]

As suggested in another currently active thread, if your plan design has a past service benefit at its effective date, that appears likely to be the funding target in the first year rather than target normal cost. That would allow a 50% cushion amount, which would certainly permit you to fund in excess of the 415 lump-sum amount... assuming that your dc contribution does not exceed 6% of pay ..triggering 404(a)(7).

The IRS still has not said what goes into funding target and what goes into TNC for an amendment with a beginning of year effective date. Nevertheless, consider a larger employer that sets up a defined benefit plan with a past service benefit to take care of its long suffering, underpensioned employees. If that past service benefit is TNC instead of funding target, the employer must fund the whole benefit in one year. This logic wouuld imply that the impact of all plan amendments increasing benefits would be no 7-year amortization, but rather much much higher one year costs

Clearly PPA contemplated that amendments and new plans would have their past service element subject to amortization...otherwise there would be no need for the restriction on benefit increases, since the past service liability associated withh the amendment would have to be funded over 1 year anyway.