Combined Plan Deduction Limits

[dan.jock]

Assuming a DB/DC combo where everyone participates in both plans.  When the DC contribution (not including deferrals) exceeds 6%, then the total deduction limit to both plans becomes 31% and the DB 'loses' it's otherwise larger max.  Say the sponsor contributes 8% of pay to DC and 40% of pay to DB.  My initial assessment is that 17% of pay is not deductible.  To the extent it does not exceed the amount of matching contributions, no excise tax is due.  If it was made in the following plan year, they can take the deduction in the following tax year and avoid any non-deductible contributions. (But that eats into the next year's 404(a)(7) limit)  My question is this, is there a provision such that they do not deduct 2% of pay contributed to DC plan, leaving the amount at 6% and thus preserve the larger DB deduction?  My read of 404(a)(7) is no.  But I'm open to other interpretations or solutions to the problem.

 

 

[dan.jock]

...also assume the DB MRC is less than 25% of pay...

[Mike Preston]

You also have to assume that the FT - AVA is less than 25% of pay....

Other than that, you are correct.

But confirm that the full 8% was deposited to the DC plan before the end of the year, right?  If so, this is just another example of how plan sponsors can be hurt financially by funding a plan before the end of the year. 

[dan.jock]

Why the provision for FT - AVA?

They did make the contribution after the plan year end.  But they need to whole thing pass 401a4 so it all has to be for that plan year.  I think I'm picking up the scent though.  They can contribute 6% for the tax year even though 8% is contributed to the plan year.  They can make contributions to prior plan years in a later tax year?  Hmm, 404(a)(7)(C)(iii)(I) says the 6% exception applies to contributions..."paid or accrued during the taxable year"

[Mike Preston]

Have you bothered to read 404(a)(7)? "In the case of a defined benefit plan which is a single employer plan, the amount necessary to satisfy the minimum funding standard provided by section 412 shall not be less than the excess (if any) of the plan's funding target (as defined in section 430(d)(1) over the value of the plan's assets (as determined under section 430(g)(3)."

Contribute only 6% to DC plan.  Let a4 test fail.  Adopt -11(g) amendment for the other 2%.  Easy peasy.

[dan.jock]

ok thx

[dan.jock]

More on this topic that I am currently researching.  Particularly addressing the 25% vs. " not be less than the excess (if any) of the plan's funding target (as defined in section 430(d)(1) over the value of the plan's assets (as determined under section 430(g)(3)." 

Say it's the first year of a plan with past service credit.  FT is 200.  AVA on val date is $0.  Minimum is 33.  Pay is 400, 25% = 100k and 6% = 24.   Sponsor contributes 30 to DC plan.  The so-called 31% rule would say the combined deduction limit is 124, leaving 94 for the DB.  Said in the 404a7 language, it is 25% of pay (100) reduced by the amount the DC contrib exceeds 6%.  100 - (30 - 24) = 94.  If I am understanding this correctly, the DB limit is actually 200 - (30 - 24) = 194.  Seems like a nice trick for first year so I'm sure I'm reading it wrong.

 

[Mike Preston]

Close.

What you have wrong is that the DB minimum is limited to the amount deposited so, in the second case, when you deposit $194 (instead of $200) to the DB, you don't accomplish anything because the total deductible drops to $218.  In the first case, if you deposit $200 to the DB the total deductible is $224. In either case, you have contributed 6 above the 6% resulting in 6 being non-deductible.

[BG5150]

On 1/12/2017 at 5:55 PM, Mike Preston said:

Contribute only 6% to DC plan.  Let a4 test fail.  Adopt -11(g) amendment for the other 2%.  Easy peasy.

Can't do this every year, though, right?

[Mike Preston]

4 hours ago, BG5150 said:

Can't do this every year, though, right?

Yes, you can.  It is an urban myth that one can't.

[BG5150]

15 minutes ago, Mike Preston said:

Yes, you can.  It is an urban myth that one can't.

I guess as long as it's not for a BRF failure:

(vi)Conditions for corrective amendment of the availability of benefits, rights, and features. A corrective amendment may not be taken into account under this paragraph (g) for purposes of satisfying § 1.401(a)(4)-4(b) for a given plan year unless -

    (A) The corrective amendment is not part of a pattern of amendments being used to            correct repeated failures with respect to a particular benefit, right, or feature;

[dan.jock]

OK, I see that.  I think that 6 being non deductible is better than limiting the whole thing to 124.  I don't have a real world scenario at my fingertips to apply and when I do, I'm sure the right decision will become evident in that case with this analysis at hand.

Thx for the input.