Employer's profit-sharing and money purchase programs are under a sing

[JWK]

This was a new design on me--trying to figure out if it can work. Forgive me if the answer's obvious.

Employer sponsors one big DC plan, with two components. First component is a profit sharing/safe harbor 401(k) plan, using the 3 percent nonelective contribution. All employees eligible. Second component is a money purchase plan with a 4 percent contribution--only the owner/sole HCE is eligible. Assume this is being treated as one plan, even though two components.

Is it permissible to test the money purchase component and the profit sharing component as a single plan under 410(B)? If not, how does the money purchase component pass coverage?

[Guest Do]

Yes you may treat the components as one plan (because they are); however, the plan is not a safe harbor allocation formula because it is not a uniform formula. If you treat the plan as one plan for 410(B) purposes, then you will have to apply the general test to pass 401(a)(4) nondiscrimination.

[MWeddell]

I don't know how these can be treated as a single plan given that (with a very limited exception) a money purchase plan cannot have a qualified cash or deferred arrangement. It seems to me like you'd have to have 2 plan documents.

[Everett Moreland]

My experience with the IRS is consistent with MWendell's. Where a money purchase plan and a profit sharing plan clearly satisfy the rules for being treated as one plan (one asset pool), the IRS treated them as two plans.

[Kirk Maldonado]

The more interesting question is whether, even if you have two plans for qualification purposes, can you combine them in a single document?

I've never filed a determination letter application on that point before, but I have several friends in different parts of the country that have received favorable determination letters.

My personal belief is that as long as each "component plan" satisfies all of the qualification requirements, thent two or more plans can be combined in the same document. There is a recent Revenue Ruling supporting that position where there is a merger of a money purchase pension plan and a profit sharing plan, although one of the plans was "frozen."

[Everett Moreland]

I have combined a profit sharing and a DB plan in one document, stating explicitly that there are two plans, one a profit sharing and one a DB. I have not yet submitted it to the IRS, but I do not anticipate a problem. I might submit it with two determination letter applications.

[david rigby]

I have seen a DB plan and PS plan combined into one document. Even if you can, it's not pretty. It starts off on a bad note, and goes downhill from there. From my experience administering this arrangement, not to mention communicating, I strongly recommend against using one document.

[Kirk Maldonado]

Trying to incorporate all of the features of a defined benefit plan and a defined contribution plan into a single document would be challenging, to say the least.

However, combining a money purchase pension plan and a profit sharing plan does not share the same level of complexity.

[Guest jdw]

We did several plan documents that had a 401(k) profit sharing plan combined with a money purchase plan in a single document. We submitted the plans for DLs on a single 5300. We received single DLs on the combined plans for a few, but usually the Service made us submit two 5300 forms and pay two user fees (one for the 401(k) profit sharing plans and one for the stand-alone money purchase).

[RLL]

The instructions to Form 5500 provide that a "pension benefit" plan may include both money purchase and profit sharing components. It is clear that such a combination plan may be accomplished through one plan document. Each component plan must satisfy the applicable requirements of IRC Section 401(a); and separate 5300 Applications would be required (unless the plan is an ESOP which includes a money purchase plan and the Application includes Form 5309).

[Guest]

I have worked on plans with more than one plan in one plan document. It's a bit unweidly (sp) but at least there's no discrepancies in the basic definitions!

[stephen]

Assuming you combine two plans into one document. Could you set up a profit sharing plan with 401(k) and matching components, paired with a 5% money purchase plan and use the match to offset the money purchase contribution?

For example: $10,000 in match could be applied to the $20,000 owed for the money purchse contribtuion leaving a balance of $10,000 owed to fulfill the balance of the Money purchase contribution?

[RLL]

dsilver ----

When a profit sharing plan is combined with a money purchase plan, the combined plan document may be as simple as a money purchase plan document with minor modifications to the employer contribution and allocation provisions.

[RLL]

stephen ---

Under IRC Section 401(m), all (or a portion of) the employer contributions used to "match" participant elective 401(k) contributions may be made to a money purchase pension plan.

[IRC401]

For those of you who believe that a plan can be both a money purchase plan and a profit-sharing plan, how do you deal with 401(a)(27)(B)?

[RLL]

IRC401 ---

Compliance with IRC Section 401(a)(27)(B) is a very simple matter. The money purchase plan portion is designated as such in the plan document, and the profit sharing plan portion is designated as such in the plan document. It just takes two sentences.

[Guest andy rochman]

Potential problem would be if one plan component were disqualified, then wouldn't the other? Also, in same vein, if in DB/DC scenario the DB portion was frozen (and well-funded) so that it became 100% vested, would it not then vest the DC portion?

[Guest mgkerisa]

Originally posted by stephen

Assuming you combine two plans into one document. Could you set up a profit sharing plan with 401(k) and matching components, paired with a 5% money purchase plan and use the match to offset the money purchase contribution?

For example:  $10,000 in match could be applied to the $20,000 owed for the money purchse contribtuion leaving a balance of $10,000 owed to fulfill the balance of the Money purchase contribution?

Stephen--I don't think that this plan design, as I understand it, would work. Since the amount of match will vary from year-to-year depending on the amount of participant contributions, it would follow that the employer contribution (as offset by the match) also would vary from year-to-year. My sense is that the IRS might view this as violating the "definitely determinable benefit" requirement applicable to pension plans.

[jquazza]

In post egtrra time, the real question is why are you doing this? It seems to me one PS plan would suffice if you just determine different rates for different groups (new comp approach.)

It seems you are setting yourself for a lot of headaches from the get go (approval from the IRS for starter,) then wait until you have to file three 5500, one for the PS, one for the MPP and probably one for the Master Trust you will end with if you comingle the assets from the PS and the MPP into one trust.

On the other hand, the benefit of having an MPP is ...

wait a minute, there isn't any.

[stephen]

jquazza- please note my original post was dated 11/00 (in pre EGTRRA time)