Cash Balance + Profit Sharing 6% Deductibility

[Stash026]

Can someone please point me to the regulation that limits to the 6% deductibility on the Cash Balance?

Thanks!  I just have someone questioning me, so I wanted to show them the actual regulation

[shERPA]

Code Section 404(a)(7)(C)(iii).

[Calavera]

I may be wrong but, I have a feeling that this post and SEP + Profit Sharing or Cash Balance - 401(k) Plans - BenefitsLink Message Boards are related.

If I am correct, note that 6% limit is not applicable for PBGC covered plans.

 

[C. B. Zeller]

39 minutes ago, Stash026 said:

Can someone please point me to the regulation that limits to the 6% deductibility on the Cash Balance?

Thanks!  I just have someone questioning me, so I wanted to show them the actual regulation

Just to be entirely clear, there is no 6% limit on the deductible contribution to the cash balance plan. When an employer sponsors overlapping DB and DC plans, and the contribution to the (non-PBGC) DB plan exceeds 25% of compensation, then the deduction on the DC plan is limited to 6% of compensation.

[Mike Preston]

3 hours ago, C. B. Zeller said:

Just to be entirely clear, there is no 6% limit on the deductible contribution to the cash balance plan. When an employer sponsors overlapping DB and DC plans, and the contribution to the (non-PBGC) DB plan exceeds 25% of compensation, then the deduction on the DC plan is limited to 6% of compensation.

What about the circumstance when there's 25% contribution to the DC plan?

 

[C. B. Zeller]

21 minutes ago, Mike Preston said:

What about the circumstance when there's 25% contribution to the DC plan?

Then the maximum on the DB plan would be the greater of 6% of comp, or the amount necessary to satisfy minimum funding; assuming that amount does not exceed the maximum under 404(o).

I'll admit I was not considering DC plans with large fixed contributions when I wrote that.

[Mike Preston]

Understood. There's also another prong to this calculation predicated on funding Target versus assets. But that's probably more detailed than is necessary at this point. Isn't  this stuff fun?

[Stash026]

So if someone is not maxing out their Cash Balance, can the Profit Sharing be greater than 6%?  What is the calculation to do greater than the 6%?

Also, is a SEP also limited to the 6% or is that separate all together?

[Jakyasar]

Yes it can be more than 6% but now you have to the 31% test i.e. combined CB/PS (including any safe harbor) cannot exceed 31% of all eligible pay. Again, this is for non-PBGC covered plans.

SEP is treated as part of the DC plan deduction and therefore included in the 6% calculations

[Jakyasar]

Hi Mike

Can you please elaborate on your statement "There's also another prong to this calculation predicated on funding Target versus assets"?

Thank you

[C. B. Zeller]

8 hours ago, Stash026 said:

So if someone is not maxing out their Cash Balance, can the Profit Sharing be greater than 6%?  What is the calculation to do greater than the 6%?

Also, is a SEP also limited to the 6% or is that separate all together?

I'll link my own post and point you here: 

A SEP is treated like a DC plan in this calculation.

 

[C. B. Zeller]

1 hour ago, Jakyasar said:

Hi Mike

Can you please elaborate on your statement "There's also another prong to this calculation predicated on funding Target versus assets"?

Thank you

He is referring to the last sentence of Code section 404(a)(7)(A).

[Jakyasar]

Thank you

[Mike Preston]

Since we have gone down the rabbit hole already I offer my internally developed worksheet.  There is no particular rationale as to why I have 3 columns displayed.  It is just a tool of convenience to be able to see, side by side, 3 calculations. I've been told by more than 1 person that I've done something wrong, but when pressed they have not provided clarification. Feel free to use, but if you find something wrong please let me know.

404a7 Limitation Calculation for BenefitsLink.xls

[Jakyasar]

Mike, this is very generous of you. Thank you