Combined Plan deduction limit

[Guest ICannotDiscloseMyIdentity]

When calculating the 404(a)(7) deduction limit for a DB/DC combination plan, assuming a small plan not subject to PBGC, what compensation must and must not be counted regarding "eligible compensation" for the 25% and 6% calculations?

1) A key employee (not terminated) who could defer, but does not, who receives no employer allocation in the DC plan and is excluded from the DB plan - does their pay count when calculating the 6% and the 25% amounts?

2) A key employee who does defer in the 401(k) but gets no employer allocation and is excluded from the DB plan?

3) An employee who gets an accrual in the DB plan, but is excluded from the DC plan

4) An employee who gets an accrual in the DB plan and only has 401(k) deferrals in the DC plan

[Andy the Actuary]

My understanding (and please jump in if there is disagreement):

The overlapping rules (i.e., 404(a)(7)) apply for a taxable year if an employer contributes to both a DB and DC plan and there is at least one common participant. The rules do not apply if the only contributions to the DC plan are employee elective deferrals.

For the purpose of the 25% overall limit imposed under 404(a)(7), consider all compensation for all participants in the two plans. So, for example, suppose the DB Plan covers 15 participants and the DC plan covers 20 participants and 10 of these are common. For 404(a)(7), compensation will be aggregated for 25 participants (5 in DB not in DC plus 10 in DC not in DB plus 10 in common).

The fact there are individuals that don't share common features is immaterial. Suppose your DC plan is a 401(k) plan with match. While your employee in (2) is not in the DB plan, the person's compensation would be counted for 404(a)(7) purposes. Ditto, your employee in (1) would be counted because such employee is a participant in the DC plan though he elected not to defer.

Again, the above discussion pertains only to the application of 404(a)(7) as it applies to the 25% of compensation determination.

The 6% limit appears to apply only to the compensation in the particular DC plan or plans. In the above example, the 20 DC participants. Thus, as another example, 404(a)(7) would have to be applied if an employer sponsored a DB plan with 10 participants and then maintained a 10% money purchase DC plan covering only one participant (NHCE) [who was also in the DB plan].