Can HCE owners contribute fully to a new Savings 401k while taking ful

[Guest Osmond Baptist]

Client wants to offer a Savings 401k while maintaining his existing Defined Benefit Plan which consists largely of the accumulated benefits of the owners of the business.

Can the owners contribute fully to the 401k as well as taking full advantage of the DB plan?

[IRC401]

Now that 415(e) is gone, the answer is clearly yes, but if the DB plan is top-heavy, the owners need to understand the consequences of having a top-heavy 401(k) plan.

[david rigby]

Correct points.

Opportunity for consulting advice: If there is a risk that the T-H aggregation group (DB plan + DC plan) will be top-heavy, then it might be worth some planning so as to minimize the problems with which plan gives the T-H accrual. Rule of thumb: it is usually cheaper to give it in the DB plan, but there may be other valid HR-related reasons or benefits-related reasons to give it in the DC plan. For example, if the DC plan has a profit-sharing feature that is expected to be utilized, then that might be the cheapest, and might also be the easiest to administer.

[rcline46]

Don't forget that total deduction is limited to 25% of pay! That rule has not gone away.

[Guest]

Further to pax's response,there are several ways you could go:

1.Give the minimum in the DB plan. The IRS always considers the DB minimum the most valuable.

2.Give a 5% contribution in DC plan. This is a safe-harbor alternative to the DB minimum.Also, bear in mind that with the repeal of 415(e) there is no longer any need to "buy back" the 1.25 multiplier by increasing the 5% to 7.5%.

3.Give a DC minimum of less than 5% but at least 3%, and demonstrate by cross-testing that the resulting benefit equals or exceeds the DB minimum.

4.Give the minimum in the DB plan,but use the DC allocations in a "floor-offset" arrangement.

Two cautions:

1.Make sure your plan documentation is in order.

2.If the plans have different eligibility provisions make sure that you don't miss anyone. For example, immediate eligibilty in the k plan for deferrals,21/1 for profit sharing,21/1 in the DB,anyone eligible to defer is considered a participant for T/H purposes and must get a DC minimum.

Good luck.

[David MacLennan]

Also bear in mind:

Elective 401k contributions also count towards the 25% of pay 404a7 deduction limit. For a small employer, the DB ctb is often >25% of comp, so often no other plan is feasible unless one does flip-flop deductions.

If you currently have a standardized prototype document, you probably can't have another plan and still have reliance on the opinion letter.

[Guest Osmond Baptist]

Thanks Guys, I really appreciate the input.

Discussions continue and we are getting closer to what's really motivating this client. His assets consist of a home, his substantial pension benefits and very little else. His retirement is well taken care (as is his wife's if she survives him). He now wants to accumulate tax deferred assets outside the DB plan which he can pass on to his son and grandson.

There are 3 other persons in the DB plan but his accrued benefits far outweigh the others. He accepts that any combined plan will be top heavy and that there will be consequences attached.

Does he need the agreement of the other participants to make such a change?

Are there other issues of which I need to be aware?

Please bear with me. This is my 1st. combination DB/DC client.

Osmond Baptist

[IRC401]

Qualified retirement plans are good places to accumulate wealth for retirement but not necessairily good places to do estate planning. Make certain that your client understands both the income in respect of decedent rules and the 401(a)(9) rules.

If anyone wants to disagree with me, consider whether we should move to the Estate Planning Board.