Defined Benefit/Money Purchase combination

[Lynn Campbell]

Owners want to make higher contributions than permitted by 25% Money Purchase Plan. A suggestion has been made to use a DB Plan for the owners only and to keep the existing Money Purchase Plan for all others. All non-owners earn at least $80,000 a year and the idea is to consider them all HCES. What about 401(a)(26) for the DB Plan? and what about 404 deductible limit of 25% for the combination? Do these apply even though no EE will participate in both Plans? I am looking for the potential problems in this arrangement and appreciate all input.

[Guest Roman]

I think your main problem here is the 404 issue of the 25% overall limit. It will apply regardless of coverage.

[Lorraine Dorsa]

I think your proposed design will probably work, but only because all employees are HCEs.

The IRC 404 25% of compensation deductible limit applies only if one or more employees participate in both plans, but since no one participates in both plans this is not an issue.

IRC 410(B) coverage is not an issue, again since all employees are HCEs.

IRC 401(a)(26) does not apply to DC plans so the MP plan is okay. The DB plan is subject to IRC 401(a)(26) and will require that either 1) at least 50 employees participate or 2) at least 40% of all nonexcludable employees, but not less than 2 employees, participate. Whether the plan passes depends on the number of employees. (Since all employees are HCEs, you could have the DB plan cover the 2 owners plus a few others and have the MP cover the remainder if you need to do this to pass 401(a)(26).)

This same approach could work if some of the employees are NHCEs, but then you would have to have a mix of HCEs and NHCEs in both plans, such that the tests are passed.

[richard]

On 401a26, watch out for changes in employment in future years. This might require enlarging the group covered by the DB plan in the future.

[Guest Keith N]

I don't think any plan that benefits only HCEs can pass 410(B). You may be able to get through the Average Benefits Part of the test (which aggregates both plans), but I don't think you will pass the Concentration part without including at least a few NHCEs.

[Lorraine Dorsa]

I agree that if you have both nonexcludable HCEs and nonexcludable NHCEs it is impossible to pass the non-discrimination tests, but if you have NO nonexcludable NHCEs, non-discrimination testing is not an issue. In the example above, the situation was HCEs only.

I have a number of plans with only HCEs (consultants, professionals, family members) and I can get quite creative in designing these plans since non-discrimination is not an issue. For example, I have designed plans where the parents benefit and the children do not. This is perfectly acceptable because all employees are HCEs (under family attribution rules of IRC 318 all are owners).