DB/MP Deduction Limit

[Guest rkaplan]

The deduction limit for a combination DB/MP plans is the greater of 25% or the DB minimum required funding.

If the DB plan is over 25% does the MP plan have to make the requried contribution on a nondeductible basis (and therefore subject to penalty of 10%)?

Can this be limited by wording in the plan document of the MP plan?

Does it have to be written in the MP plan or can the contibution be ignored since not deductible?

Thanks, in advance

Bob

[Guest]

Both the MP & the DB are subject to min. funding standards and therefore each contribution must be made. I don't know if the MP plan doc could contain some sort of language exempting it from the contribtion of the DB is > 25% of pay, but it seems like it may work. Of coarse, it would have to be a prospective change.

[david rigby]

this seems to be a situation in which a DB/MP combination does not make sense. If the DB contribution is expected to be around (or above) 25% then having a PS plan might be better.

[richard]

Without special langange that I'll describe in a moment, the plan sponsor would have to make the required contribution to the money purchase, and it would not be deductible. I vaguely recall that the 10% excise tax might be waived in this type of situation (my memory could be faulty, though); but that would have to be researched.

Now, the money purchase plan could be written so that its required contribution would be reduced so that the 25% maximum would not be exceeded. If properly done, the nondeductible issue would be solved. The language is tricky, because in order for the contribution to be definitely determinable, the calculation methodology of the defined benefit contribution would have to be specified in the money purchase plan document, including (imho) funding method and assumptions. I don't know if the IRS takes this hard line; they might accept language such as "the money purchase contribution is equal to the lesser of (a) 10% (for example) or (B) 25% minus the DB plan required contribution."

[SoCalActuary]

Does your software vendor have a solution?

You have other choices:

Learn to use vlookup in Excel

Contract with your local tech expert

Change to vendors who can combine both plans (suggestions available if requested)

Have an associate of yours or your consulting actuary help you.

[SoCalActuary]

Sorry, that last message was intended to respond to another question.

[Guest Kevin Birmingham]

Code section 404(a)(7) has the 25% limitation that you referred to in the question. That section has a statement that says 'a defiend contribution plan whis is a pension plan shall not be treated as failing to provide definetely determinable benefits merely by limiting employer contributions to the amouns deductible under this section".

This should ease the burden on writing the appropriate language into the document.