Combined DB/DC & 404 Deduction

[Guest cngriffin]

I am new to EB, so forgive me if I use incorrect terminology.

I have a client that wants to set up a consulting business. After incorporating, he wants to create both a DB and a DC plan. He will be the sole employee and he is currently 57 years old. I understand that the super top heavy limitations for combined DB & DC plans have been eliminated for plan years after 1999.

However, my question is how these changes have affected the corporate deductions allowed under 404? As I read 404, the corp. will be able to take a deduction of the greater of 25% of compensation or the 412 minimum funding limitation. How high can the 412 minimum funding be? I believe he wants to pay himself over $150k/year and is looking to retire at 65. Would I need to determine what his defined benefit will be starting at age 65 and amortize that to determine the current minimum funding?

Many thanks!

------------------

_______________________________________

Charles N. Griffin, III

Kirschbaum, Nanney, Brown & Keenan

300 W. Millbrook Road

P.O. Box 19766

Raleigh, NC 27619

Telephone: (919) 848-0420

Fax: (919) 848-4216

email: cngriffin@abanet.org

Licensed in North Carolina and South Carolina.

Practicing in the areas of estate planning and administration, tax, corporate formation, and

business and employment law.

This communication is merely informational and should not be relied upon as legal advice. No attorney-client relationship is intended or created through the use of this non-priviledged form of communcation.

[Guest Roman]

What was eliminated after 1999 is the combined 415 limits for both DB and DC. In answer to your question, Sec 404 still applies when you have both a DB and a DC. Your DB is only limited by the DB max and can be over 25% of pay. If it is over 25% of pay, then you cannot have a DC contribution that can be deductible. Thus, you cannot have a money purchase plan that requires a 25% contribution together with a DB plan unless the DB funding requirement if zero.

[mwyatt]

Actually, you COULD have a maxed out DB plan and a 25% of pay MP plan in place. However, as mentioned you wouldn't want to do this as the IRC 404 25% combined plan limitation would still apply and the annual deduction would be limited to the greater of 25% of eligible compensation and the amount required to fund the DB plan. Anything above that amount would be subject to the 10% excise tax on nondeductible contributions (including, in future years prior contributions not yet deducted) so that this would certainly not be in the client's best interests. Also, both plans are subject to 412 minimum funding requirements, so that an obligation exists to fund both plans, regardless of 404 consequences.

I have seen some language or references to fail-safes under a MP plan which cuts out the contribution if a 404 violation would be in place; in practice, most clients utilize a DB/PS combination, using the PS plan to "top up" to the full 25% of pay. Given the client's age of 57, it is probable that a DB plan could be established generating contributions well in excess of 25% so that there would be little point to establishing a companion DC plan.

[david rigby]

As MWYATT has pointed out, if he can afford it, he could probably have a deductible contribution (per year) of about 100K to 150K, to fund the maximum benefit for a DB plan (currently an annuity of 130K per year).

This is a perfect example of how and when a DB plan is far superior to a DC plan; that is, establishing a plan "late" and being able to fund substantial amounts.

[This message has been edited by pax (edited 03-11-99).]