Maximum Deduction under 404(0)

[Guest DCquestioner]

For new plans in 2008, is a new plan considered a plan amendment for purposes of calculating the maximum deductible contribution with regard to the funding target for HCEs?

I know in 2007, this was not the case, but the 2008 ERISA Outline Book says this is uncertain for 2008 (it sounds like it leans towards a new plan not being an amendment similar to the 2007 rule).

Any thoughts?

Thanks!

[John Feldt ERPA CPC QPA]

As long as there was not a DB plan in place for at least 2 years prior, then a new plan is not considered an amendment.

If the HCEs are accruing near the 415 limit, you are not able to go with a 50% cushion beyond their 415 limits (at least that's my opinion).

[JAY21]

John, are you sure on the 50% cushion not apply to those at 415 limit ? I don't remember seeing anything like that and am operating under an opposite view so if I'm wrong I'd prefer to know now vs. later. Why do you think that ?

[Andy the Actuary]

404(o)(3)(B)(i) says in computing A(ii), you apply comp limit and 415. A(ii) refers to increases in compensation when determining the cushion -- it does not appear to apply to the 50% multiplier in A(i).

[tymesup]

Which is not to say that it's wise to fund for a benefit that can't be paid.

[Andy the Actuary]

Which is not to say that it's wise to fund for a benefit that can't be paid.

That can happen if interest rates increase despite wisdom

[tymesup]

OK, Scylla.

[Andy the Actuary]

OK, Scylla.

And back at cha, Charybdis

[John Feldt ERPA CPC QPA]

Okay, let's post the cite:

404(o)(3)(A) IN GENERAL. The cushion amount for any plan year is the sum of

(i) 50 percent of the funding target for the plan year, and

(ii)

the amount by which the funding target for the plan year would increase if the plan were to take into account

(I) increases in compensation which are expected to occur in succeeding plan years, or

(II) if the plan does not base benefits for service to date on compensation, increases in benefits which are expected to occur in succeeding plan years (determined on the basis of the average annual increase in benefits over the 6 immediately preceding plan years).

404(o)(3)(B) LIMITATIONS.

(i) IN GENERAL. In making the computation under subparagraph

(A)(ii)

, the plan's actuary shall assume that the limitations under subsection (l) and section 415(b) shall apply.

(ii) EXPECTED INCREASES. --In the case of a plan year during which a plan is covered under section 4021 of the Employee Retirement Income Security Act of 1974, the plan's actuary may, notwithstanding subsection (l), take into account increases in the limitations which are expected to occur in succeeding plan years.

subsection (l) is 404(l), the compensation limitation.

Okay, so an accrual of 1/10 of the DB 415 dollar limit in year one could provide a first year party due to the contribution to be made, but only wake up with a hangover in year #2, right? Drive safe though (we don't want any death benefit problems).

Thanks Andy and Jay - when looking this through, I would agree and although it seems rare it is certainly possible for the right client (one who is okay with the hangover and the death benefit issue).

[John Feldt ERPA CPC QPA]

Jay,

Something I read many months ago had made me believe that we couldn't be that aggressive until the technical corrections bill gets passed, but I can no longer find that reference. Perhaps it was a verbal comment from a conference.

[Andy the Actuary]

Perhaps it was a verbal comment from a conference.

"A verbal contract isn't worth the paper it's printed on" -- Louis B. Mayer

[John Feldt ERPA CPC QPA]

Yep, you got that right!