Violation of SH mid-year change rules? Adding a 2013 DB plan, DC SH already in place

[justanotheradmin]

Basic Information:

ER sponsors a DC plan, utilizes SH Match. ER Would like to have a greater deduction for 2013. It is a calendar year plan. Only a handful of participants mostly the owner and his family. DC plan allows for a discretionary contribution, allocated on a pro-rata (across compensation) basis.

My understanding is that the plan would not be allowed to change the profit sharing allocation method to something more favorable, such as cross-tested. The ER is interested in adding a DB plan, but one that is offset by the DC plan. Typically I would add a DB plan, and amend the DC plan to add language making it crystal clear what the offset arrangement it. And do it all prospectively. In this case, they want the deduction for 2013 and the prohibition against the changes to the Safe Harbor plan during the year would prevent the PS allocation method change.

Would the addition of the DB plan in 2013 be considered a change, such that it would violate the prohibition against mid-year changes on the SH DC plan? I don't know if the DB and DC would be considered 1 plan, or could be considered 2 for this purpose. The DB plan would reference the DC plan and offset, but the DC plan would not, until a new amendment is effective in 2014.

If that doesn't work, could the ER set up a new DC profit sharing only plan to pair with the new DB plan? The SH Match would be provided in DC plan 1, a PS contribution would go into DC plan 2 as the offset, and then there would be the DB plan.

Or is all of this pointless because under ERISA they would all be considered one plan anyways and would be an impermissable change to the original SH plan?

Thoughts? Advice?

[Lou S.]

If that doesn't work, could the ER set up a new DC profit sharing only plan to pair with the new DB plan? The SH Match would be provided in DC plan 1, a PS contribution would go into DC plan 2 as the offset, and then there would be the DB plan.

Or is all of this pointless because under ERISA they would all be considered one plan anyways and would be an impermissable change to the original SH plan?

Thoughts? Advice?

This would be the correct way to go. Change the SH plan for 2014 and merge DC plan #2 in to SH plan in 2014. Draw back is addition expense for document, 2 5500s, merge documentation, etc.

[AndyH]

My advice is don't do the offset. Ever. Add a cash balance plan.

[Effen]

I pretty much agree with AndyH - just not a believer in offsets. I find you can generally accomplish pretty close to the same net allocation without the risk associated with offset plans.

Look at leaving the PS alone in 13 and adding a cash balance, Use the Dc allocations in your general test and see how much you can put in your DB. Then, figure out your plan design for 2014, which might involve an offset and a different Cb formula. Don't assume you need to cut the PS allocation to make the overall design work.

Adding a third plan for just one year usually just creates a lot of admin charges that can be hard to justify.

[justanotheradmin]

Thanks for the suggestions, particularly Effen, for the explanation. I don't know what the client will go with, just want to make sure whatever it is, that it will actually work.