Getting the best of both worlds: a defined benefit plan plus a 401(k) plan.

One of the more intriguing planning ideas to become effective in 2001 is combining a defined benefit plan and a 401(k) plan to achieve maximum contribution size and flexibility. Before 2001, some small business owners faced a dilemma. The limits of IRC Section 404 made it impractical for most businesses to sponsor both a defined benefit plan and a 401(k) plan.

A defined benefit plan is the best way for the owner of a business to accumulate a lot of money for retirement in a short period of time. However, many employees, especially younger ones, like the idea of a 401(k) plan better. Participants often can self-direct the investment of their 401(k) funds, and there is a feeling of current wealth accumulation inherent in a 401(k) plan that is not as apparent in a defined benefit plan. The business owner was thus faced with either sacrificing his or her own financial security at retirement or denying employees the 401(k) plan they wanted.

Starting in 2001, the laws have been changed to allow a business to sponsor both types of plans without having to worry about the limits of IRC Section 404. This is because salary deferral contributions to a 401(k) plan no longer count toward the 404 limits on tax deductible contributions. Thus, regardless of the size of the contribution to the defined benefit plan, employees can make tax deductible contributions to a 401(k) plan.

This creates a number of creative planning ideas. For example, adding a 401(k) plan to an existing defined benefit plan can increase tax deductible contributions by $11,000 or more per participant. There are other possibilities. Give us a call if you would like more guidance.

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Independent Actuaries, Inc. would like to take this opportunity to announce the recent addition of three highly skilled consulting actuaries to its team.

Catherine MacLeod, FSA, EA, MAAA joined Independent Actuaries this year after taking a five year hiatus from the pension field to raise her twins. Prior to that she had accumulated 20 years of actuarial and retirement business experience managing the Retirement Plan Services unit for Standard Insurance Company and consulting for Howard Johnson and Company.

Alan J. Stonewall, FSPA, MAAA, EA has been an actuary in the pension and benefits field since 1969. He is a fellow in the American Society of Pension Actuaries, a member of the American Academy of Actuaries and an Enrolled Actuary. In addition, Alan has served as President the American Society of Pension Actuaries and as Chairperson of the Actuarial Standards Board.

Carla J. Tate, QPA is the most recent addition to the Independent Actuaries team. Carla is a QPA who has 26 years of pension administration experience. Prior to joining IAI, Carla served as Managing Consultant at Cascade Pension Services (now Invesmart), and as a defined benefit plan administrator at SPS Consulting.