Revisiting the Combined DB/DC Limitation

[ubermax]

I'm revisiting 404(a)(7) and the deduction limitation where DB & DC plans are involved - 404(a)(7)©(iv) tells me that PBGC covered plans aren't addressed by 404(a)(7) , i.e. I guess only the individual limits are applicable - for the plans that do fall under (a)(7) , it looks like :

the combined plan limitation = max ( 25% of comp, max( MFA, FT-Assets)) , where MRC = Min.Req.Contribution , FT= Funding Target.

If the only DC contributions are deferrals, then the individual limitations apply , e.g. 404(a)(3) and 404(o) .

If DC contributions are <= 6% of comp , then again the individual limitations apply.

If DC contributions > 6% of comp then, only counting the amount of DC contributions > 6% , the combined plan limitation expressed above is used.

I realize that WRERA is ancient history but would appreciate knowing if the above interpretation is on track and, if not , hopefully someone will provide some insight.

thanks in advance .

[Effen]

For non PBGC plans, I think of it as a 31% limit, unless the DC is less than 6%. My understanding is the first 6% doesn't count against the limit and therefore the 25% becomes 31% if they contribute more than 6% into the DC. However, if they contribute 6% or less, then it is like it never happened and they can fund the DB up to the DB max.

[ubermax]

thanks for the reply Effen - so for DC contributions > 6% , since non-PBGC plans would include the sole props & partnerships that are common in the small plan market, I guess the 25% of pay would most likely be greater than the max ( MFA, ( FT-Assets) ) and hence the 31% in practice - is that the thinking ?

but do you agree that generally it's max ( 25% , max(MFA,(FT-Assets) ) ?

[Effen]

No, I wouldn't say that. I was really just commenting on the 25%/31% limit.

If the minimum required contribution (MRC) is > 25%, they need to make the MRC and then they can put in up to 6% into the DC. If the MRC is < 25% and the maximum deductible is > 25% of comp, they can either put less than 6% into the DC and any amount less than the max in the db. Or, they can put X into the DC where X >6% so that the max DB would be 25%-(X-6%, not less than 0), as long as the MRC is satisfied.

Also, I'm not really sure what you are saying by "max ( 25% , max(MFA,(FT-Assets))". I'm not sure why FT-Assets is relevant to anything. Are you thinking about the MRC or the max deduction? The maximum is more complex than just FT-Assets and the MRC is determined on a completely different basis, so I wasn't sure what you were trying to get at.

[ubermax]

if I just look at 404(a)(7)(A) , total deductible not > max(25%, MRC) and then the last paragraph of 404(a)(7)(A) says that the amount necessary to satisfy the minimum funding standard of 412 shall not be < (FT-Assets) .

so if MRC is 30% of pay & (FT-Assets) is 32% of pay and the DC contribution is 10% of pay wouldn't the deductible limit for the DB be 28% of pay, i.e. (32-(10-6)) as long as the 28% is < 404(o) as applied to the DB plan ?

My beginning point is interpreting the words in 404(a)(7)(A) - where am I going wrong ?

[Andy the Actuary]

Just to avoid confusion, if the combined deduction limits don't apply (i.e., dc contribution is <=6%), then single plan db limit applies which takes into account cushion amount, etc.

Any comments?

[ubermax]

Just to avoid confusion, if the combined deduction limits don't apply (i.e., dc contribution is <=6%), then single plan db limit applies which takes into account cushion amount, etc.

Any comments?

yes, I agree but I'm now second guessing my prior thread, i.e. if the DB combined limit is 28% of pay and 404(o) is 27% what's to prevent a 28% deduction ? is there guidance that says the individual limit trumps a combined limit ?