Pension
Trends Volume X, No. 4, November 2009
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Pension
Trends Volume X, No. 4, November 2009
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In this issue...
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What is a DB(k) Plan and Who Would Want One?
People are starting to talk about DB(k) plans, but what is a DB(k) plan? A DB(k) plan is a combined defined benefit (DB) and 401(k) defined contribution (DC) employer sponsored retirement plan that will be available beginning January 1, 2010. Congress created DB(k) plans to encourage more small businesses to sponsor defined benefit plans. By permitting both a DB and 401 (k) plan to be included in one plan document (and thus requiring only one annual Form 5500 filing) and eliminating some of the complicated testing usually required of such plans, maintenance costs are reduced. Employers who would otherwise have two separate plans can expect to save between $1,000 to $3,000 annually in professional service fees. The savings and reduced testing are great, but DB(k) plans also come with a few strings:
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DB(k) plans are available only to employers with 2 to 500 employees. |
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It must provide a DB benefit that is at least 1 percent of final average compensation multiplied by the number of years of service (for the traditional benefit) or annual pay credits of between 2 and 8 percent for each participant (depending on the age of the participant in a cash balance plan). The benefit formula must be “uniform” for all employees and may not be integrated with social security, effectively preventing employers from rewarding select employees with greater plan benefits. |
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The 401(k) portion of the plan must provide matching contributions of at least 50% on 401(k) deferrals up to 4% of a participant’s total compensation. Once again, the match formula must be uniform between highly compensated and lesser compensated employees. |
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The 401(k) portion of the plan must include an automatic contribution arrangement for 401(k) deferrals. Employees may opt out of this provision. |
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All 401(k) deferrals and matching contributions are fully vested. A maximum three year vesting schedule is allowed before the defined benefit or profit sharing account is fully vested. Non-DB(k) plans typically use a six year graded vesting schedule. For employers with significant turnover in the two to five year range, the vesting schedule may become expensive as the employer will be required to make contributions that would otherwise be paid for with forfeited funds. |
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Author Profile |
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Jason W. Douthit, J.D.
This article was written by Jason W. Douthit, J.D. Jason’s
work focuses on defined contribution plans and executive deferred
compensation plans. He also represents employers in matters related to IRS
and Department of Labor qualified plan correction programs. Jason holds a
B.A. in Labor Studies and Philosophy, a J.D. from University of California
at Davis School of Law, and is a member of the Oregon State Bar. |
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In addition to the required provisions, DB(k) plans may also include profit sharing contributions (note that profit sharing contributions are discretionary and not tied to profits). However, like the matching contributions above and the defined benefit formulas, there is a uniformity requirement regarding the allocation of any profit sharing contribution. DB(k) plans are similar to SIMPLE or SEP plans in that these plans have reduced testing requirements and costs, but are constrained in design such that business owners cannot use such plans strategically; where DB(k) plans seek to avoid testing altogether, traditional DB and DC plans take advantage of such testing and allow business owners to use such plans as an effective tax planning tool or reward for valuable employees to the limits of the law.
In other words, it is the testing itself that often makes such plans valuable to small business owners. Given the potential document and service fee savings, DB(k) plans may be attractive to some employers. However, small business owners wishing to save large amounts of tax deferred income for themselves and employers seeking primarily to reward select employees will find traditional DB and DC plans allow them to better realize their goals.
The IRS recently released the 2010 limits on qualified plan benefits, contributions and compensation. The limits are tied to inflation and, as the consumer price index actually fell in 2009, the 2010 limits are unchanged from the previous year. Key limits are as follows (see Retirement Plan Limits for a complete table):
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Compensation – a maximum of $245,000 is recognized for plan purposes. |
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401(k) Deferrals – employees may defer a maximum of $16,500 to their 401(k) accounts. Employees age 50 or older may make "catch-up contributions" up to an additional $5,500. |
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Total Contributions to a Defined Contribution Plan (aka "DC Annual Additions Limit") – the total combined employer and 401(k) contributions to a DC plan cannot exceed $49,000 for each participating employee. Catch-up contributions are not included in that limit. |
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Total Benefits for a Defined Benefit Plan (aka "DB Annual Benefit Limit") – the maximum annual benefit at retirement (age 62-65) that a DB plan can offer to each employee is $195,000. |
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Highly Compensated Employees (HCEs) – for non-discrimination testing purposes, employees earning more than $110,000 in 2010 will be deemed HCEs in 2011. |
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Key Employees – for non-discrimination testing purposes, officers of the company earning more than $160,000 are deemed key employees. |
In October, the IRS published final regulations clarifying some of the changes to defined benefit funding requirements and benefit restrictions as enacted by the Pension Protection Act (PPA). While the regulations consisted of hundreds of pages of material, most was technical in nature. Some of the highlights include:
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Plan sponsor flexibility in the assumptions used when determining contribution requirements for the year, |
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Clarification on content and timing for plan sponsor elections with respect to credit balances, and |
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Specifics on the application of benefit restrictions. |
We will advise our clients individually regarding the effects of these regulations on them.
This newsletter has been published in order to share general
information with our professional contacts. The information presented in this
newsletter should not be acted upon without first seeking the advice of a CPA,
attorney or other benefit professional.
Pension Trends, Volume
X, No. 4, November 2009
Copyright © 2009 Independent Actuaries, Inc.