Treatment/correction of excess employer contribution to profit sharing plan coordinated with DB Cash Balance Plan

Good afternoon folks - new to the boards.

I've received inconsistent responses to an issue I'm facing, and interested in the expert opinions found here on the board. 

I have a Solo 401k/profit sharing plan for my business, which includes my spouse and me. In 2020, I added a DB Cash balance plan. We have both contributed the max employee deferral for 2020, including catch-up contributions. Typically throughout the year, we contribute 25% of compensation to the plan as the profit sharing contribution, rather than waiting until the end of the year. 

We continued this practice even as we were exploring the adoption of the DB Cash balance plan, which we adopted prior to year-end 2020.

We now find that we have made profit sharing contributions in excess of the 6% limit for combined DC/DB plans, when considering the minimum funding contribution for the DB plan will be in excess of 25% of compensation (we are both over 55). I had hoped that since we were in the same plan year, and the contributions affect both my spouse and I equally, that we could transfer the amount exceeding the 6% of employer profit sharing contributions to the DB plan as part of the minimum funding DB contribution for the same plan year.  However, it appears more likely that we need to keep the contributions and any earnings in the DC plan, and report them via 5330 to liquidate against future year contributions.  

Has anyone dealt with a similar situation, and what was your solution? Ideally, I'd hope to transfer the excess 2020 profit sharing contribution to the DB/Cash Balance plan as part of the minimum contribution for 2020, as a correction. Open to any suggestions (the one I'm taking for sure is to let someone handle this going forward as it's too much to do this and run a business). 

Thanks in advance - 

If you play with your deposits and transfer between plans then you are asking for trouble, in my opinion, as that is not a legal transaction. Whoever set up your DB should have asked about your PS and its 2020 funding BEFORE adopting the new plan and informed you of that limitation. 

If your did not make your DB deposit in 2020, you could deduct for 2020 (deposited in 2021) up to your combined plan limit and then deduct for 2021 the remaining amount of your 2020 minimum required funding deposited in 2021. You'll need to limit all future PS to 6% of eligible pay and best to do this after year-end. The funding rules are such that your maximum DB deduction in year 2 should be significantly higher than your 2021 minimum, so you should be able to deduct some of your 2021 requirement for 2021 as well and so on, catching up eventually.

You need an actuary for a DBP, or a TPA who outsources to an actuary for required functions, and the actuary and/or TPA should be able to map this out for you. 

Did you have ANY employees besides you and your spouse in 2020?  A part time family member, perhaps?

13 minutes ago, shERPA said:

Did you have ANY employees besides you and your spouse in 2020?  A part time family member, perhaps?

@shERPA - No additional employees; its just the two of us. 

The 6% limit only applies if the DB plan is exempt from PBGC coverage.

If your business is a sole proprietorship (not a corporation) and you are not in the business of professional services, then you might not be exempt. If you are not exempt then you are probably past due on a 2020 PBGC premium, but you would be able to get the full 25% deduction on the profit sharing plan.

44 minutes ago, C. B. Zeller said:

The 6% limit only applies if the DB plan is exempt from PBGC coverage.

If your business is a sole proprietorship (not a corporation) and you are not in the business of professional services, then you might not be exempt. If you are not exempt then you are probably past due on a 2020 PBGC premium, but you would be able to get the full 25% deduction on the profit sharing plan.

CB - we are PBGC exempt. Unfortunately, that 6% is killing me. I am sitting at about 14% - which I fear will mean that I carry a balance forward into 2021, reduce by 6% of compensation for 2021, pay a penalty (I'll still be over the 6%), then carry forward in to 2022, where I should deplete the carry forward. I was hoping to return to either allocate the deposits to the DB plan (doesn't appear possible per CuseFan's guidance, and also supported by what I've read) or distribute to the employees (my spouse and I) as taxable income due to excess contribution by the employer (still researching, but coming up short). 

See Cusefan's post above with respect to timing and deducting the combined DB/DC contributions. It will probably limit your 2020 deduction with respect to the DB plan but may let you avoid the excise tax on non-deductible contributions. But even if you are deducting some of the DB contribution in 2020 and some in 2021, you would still need to satisfy the minimum funding deadline by 9/15/21 for 2020 calendar year DB plans.

Not sure about the salaries and the minimum required contribution (MRC) for the db plan but did you look at the 31% rule? If the salaries are at maximum levels and the db plan MRC is not so high and also contributed after 12/31/2020, you may be ok, all facts and circumstances, just a thought.

Please confirm why you are PBGC exempt. I might have missed where you defined whether or not you are a corporation.

I contributed greater than 6% one year and the vendor sets up a new account for the excess--until utilized---can be a pain in the neck.

3 minutes ago, Bob the Swimmer said:

I contributed greater than 6% one year and the vendor sets up a new account for the excess--until utilized---can be a pain in the neck.

That doesn't pass muster, Bob.