Combined Plan Designs – Dual Plans

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. Since 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.

Cash Balance + Safe Harbor 401(k) Combo

Shown below is a Cash Balance plan for which the contribution exceeds 25% of payroll. 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 non-highly compensated 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.

Cash Balance + Safe Harbor 401(k) Combo

Here is an illustration of a cash balance plan with a safe harbor 401(k) profit sharing plan.

Over 85% of the employer contribution is allocable to the owners and they can each defer $26,000 as well. The profit sharing contribution is allocated on a cross-tested basis, with different percentages going to the owners, the non-owner Highly Compensated Employee (HCE) and the Non-Highly Compensated Employees (NHCE). 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.