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Combined Plan Designs
In the past, an employer’s maximum deduction to all plans for a fiscal year equaled the greater of the required contribution for the DB plan or 25% of total participants’ eligible compensation. Under the new rules, as of 2006 an employer can contribute up to 6% of pay to a DC plan in addition to the required DB contribution, even if the resulting total exceeds the 25% limit. Employee deferrals do not count towards the 6% or the 25% limit. This new rule offers many opportunities for a combined plan approach.
Shown below is a DB plan for 2008 in which the contribution exceeds 25% of payroll. Under the new rules, the employer can also adopt a safe harbor 401(k) plan that meets the 401(k) nondiscrimination requirements by guaranteeing a 3% of pay contribution to all NHCE participants. The plan also allows discretionary profit sharing contributions. In this example the profit sharing contribution is allocated on a cross-tested basis, with a higher percentage going to the owner, who is older. The sum of the safe harbor and profit sharing contributions cannot exceed 6% of total participant compensation.
Employee |
Age |
Salary |
DB Cost |
Deferral |
PS Contrib.* |
Owner |
52 |
$220,000 |
$133,518 |
$20,000 |
$14,250 |
Assistant |
25 |
$35,000 |
$5,334 |
unknown |
$1,050 |
Total |
|
$255,000 |
$138,852 |
$20,000+ |
$15,300 |
*Profit sharing contribution includes the 3% safe harbor contribution. |
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Prior to 2006, this sponsor would have only been able to deduct the DB contribution, and the owner’s salary deferrals would have been limited based on what the assistant deferred. The addition of the safe harbor 401(k) profit sharing plan allows the owner to increase his own contribution by $34,250 with an additional contribution for the assistant of only $1,050. The assistant can further benefit by making pre-tax salary deferrals into the 401(k) plan.
Here is an illustration of a cash balance plan with a safe harbor 401(k) profit sharing plan for 2006:
Employee |
Age |
Salary |
Cash Balance Cost |
Deferral |
PS Contrib. |
Owner 1 |
59 |
$220,000 |
$100,000 |
$20,000 |
$14,283 |
Owner 2 |
54 |
$220,000 |
$100,000 |
$20,000 |
$14,283 |
Other HCE |
56 |
$120,000 |
$3,000 |
$6,600 |
$6,672 |
8 NHCEs |
various |
$372,470 |
$9,312 |
unknown |
$20,710 |
Total |
|
$932,470 |
$212,312 |
$46,600+ |
$55,948 |
Over 85% of the employer contribution is allocable to the owners and they can each defer $20,500 as well. The profit sharing contribution is allocated on a cross-tested basis, with different percentages going to the owners, the non-owner HCE and the NHCEs.The plan design can go even further by excluding some employees from each plan and combining the plans for testing purposes. It can be useful if you have both older and younger HCEs. The younger HCEs can benefit under the DC plan while the older HCEs benefit under the DB plan.Note that effective in 2008, DB plans covered by the PBGC will no longer count towards the 25% contribution deduction limit. As a result, sponsors of PBGC insured plans will be able to fund a DC plan up to 25% of compensation in addition to their DB plan.