Contribution Deductibility

[Stash026]

I have a Plan that's just a husband & wife and they want to move to a Cash Balance/Profit Sharing combination.  For contribution deductibility, do we have to integrate the Plans (meaning if the Cash Balance is more than 25% of the eligible compensation, you are limited to 6% in the Profit Sharing)?  Or can the plans not be integrated, allowing the full $57k in the Profit Sharing as well as the contribution in the Cash Balance?

Thanks everyone!

[CuseFan]

So owner-only non-pbgc covered DB plan - yes, combined deduction limits apply and PS must be limited to 6% or you essentially end up with a 31% combined limit.

Assuming they do not do salary deferrals elsewhere, be sure to include 401(k) provision so each can also defer $19,500 or $26,000.

[C. B. Zeller]

The combined deduction limit of 404(a)(7) applies only when the DB plan is exempt from PBGC  coverage. Is the plan covered by PBGC?

Before you answer, note that the PBGC's position (stated here) is that spousal attribution of ownership applies only in the case of a corporation. If the business is a sole proprietorship then it is not clear that they would fall under the exemption for a substantial owners plan. They might still be exempt if they are a professional services employer.

[Stash026]

So if they are exempt the deduction limit does not apply and they could max out on both plans without an issue?

12 minutes ago, C. B. Zeller said:

The combined deduction limit of 404(a)(7) applies only when the DB plan is exempt from PBGC  coverage. Is the plan covered by PBGC?

Before you answer, note that the PBGC's position (stated here) is that spousal attribution of ownership applies only in the case of a corporation. If the business is a sole proprietorship then it is not clear that they would fall under the exemption for a substantial owners plan. They might still be exempt if they are a professional services employer.

 

[C. B. Zeller]

Just now, Stash026 said:

So if they are exempt the deduction limit does not apply and they could max out on both plans without an issue?

No, you have it backwards. If they are exempt (that is, not covered by PBGC) then the combined deduction limit applies.

If they are not exempt (they are covered by PBGC) then the combined limit does not apply.

[FORMER ESQ.]

5 hours ago, C. B. Zeller said:

The combined deduction limit of 404(a)(7) applies only when the DB plan is exempt from PBGC  coverage

Not exactly. The deduction limit applies in the event the DC plan contributions exceed 6% of compensation.  Essentially, DB/DC plan contributions are limited to 31% of compensation. 

[Mike Preston]

48 minutes ago, FORMER ESQ. said:

Not exactly. The deduction limit applies in the event the DC plan contributions exceed 6% of compensation.  Essentially, DB/DC plan contributions are limited to 31% of compensation. 

Can't be correct.  Need something addressing PBGC.

[Stash026]

So if they are paying a PBGC Premium they are allowed to go over the 6% into the DC Plan and still deduct it?  If they aren't paying into the DC Plan they can't?

I just want to make sure that I'm completely clear on this.  Thanks in advance!

[FORMER ESQ.]

12 hours ago, Mike Preston said:

Can't be correct.  Need something addressing PBGC.

Mike, what I am trying to say is the following:

If a contribution is made to the DC plan and those contributions do not exceed 6% of compensation, then the 404(a)(7) combined limit does not apply to either the contributions to the DC plan or the contributions to the DB plan.

Is the above a correct statement?

[C. B. Zeller]

The way I usually calculate the max deduction is like this, which works in most situations:

1. Calculate the DB max under 404(o). This is always the DB max, although you might choose to do a smaller amount in order to have a larger result in step 3.
2. Calculate 25% of comp, within the meaning of 404(a)(3).
   If the DB plan is covered by PBGC, stop here. This amount is the DC max.
   If the there are no employees who participate in both plans, stop here. This amount is the DC max.
3. Subtract the DB contribution from the amount calculated in step 2, but not less than zero.
4. Add 6% of comp to the amount calculated in step 3. This is the DC max.

[FORMER ESQ.]

1 minute ago, C. B. Zeller said:

The way I usually calculate the max deduction is like this, which works in most situations:

1. Calculate the DB max under 404(o). This is always the DB max, although you might choose to do a smaller amount in order to have a larger result in step 3.
2. Calculate 25% of comp, within the meaning of 404(a)(3).
   If the DB plan is covered by PBGC, stop here. This amount is the DC max.
   If the there are no employees who participate in both plans, stop here. This amount is the DC max.
3. Subtract the DB contribution from the amount calculated in step 2, but not less than zero.
4. Add 6% of comp to the amount calculated in step 3. This is the DC max.

This is great! Thank you.

[C. B. Zeller]

3 hours ago, Stash026 said:

So if they are paying a PBGC Premium they are allowed to go over the 6% into the DC Plan and still deduct it?  If they aren't paying into the DC Plan they can't?

Strictly speaking, the IRS cares about whether you are required to pay a PBGC premium, not whether you actually paid it. Assuming that the plan is paying a PBGC premium if and only if it is required to do so, then you are correct.

[Mike Preston]

7 hours ago, FORMER ESQ. said:

Mike, what I am trying to say is the following:

If a contribution is made to the DC plan and those contributions do not exceed 6% of compensation, then the 404(a)(7) combined limit does not apply to either the contributions to the DC plan or the contributions to the DB plan.

Is the above a correct statement?

Yes, but as pointed out in future messages things are more complicated than that.