DB/DC Combo Plans Maximize Contributions to Key Personnel

One way to maximize benefits to key personnel and also maximize the key personnel’s share of the company’s total retirement plans contributions is referred to as a defined benefit/defined contribution (DB/DC) combo plan. These plans require general nondiscrimination testing and must follow several additional rules.  These include a gateway test that must be passed which requires a contribution of up to 7.5% of compensation for non-highly compensated employees (“NHCEs”) as defined by the Internal Revenue Code. The gateway provides minimum benefits for NHCEs to allow additional benefits for highly compensated employees under general nondiscrimination testing.

These types of plan design are very dependent upon the demographics of the group.  However, given minimum coverage and participation rules, you may not have to cover all NHCEs under the plan.  For small employers, the addition or termination of one or two employees may have a significant impact on the general nondiscrimination testing. This may require modifications to the plan design as required to accommodate such changes in demographics to pass the nondiscrimination testing, or they should not adopt the DB/DC approach.

For DB/DC combo plans, it often makes sense to have the 401(k) profit sharing plan be a safe harbor plan. A safe harbor 401(k) plan requires minimum employer contributions such as 3% of compensation (or a minimum matching employer contribution) for NHCEs. This exempts the plan from certain 401(k) nondiscrimination testing and allows highly compensated employees (“HCEs”) to defer the maximum amount allowed without concern about the deferral rate among the NHCEs.  These safe harbor contributions are applied toward top-heavy and gateway contribution requirements as well as general nondiscrimination testing.

This is meant as a brief overview of plan design rules & options.  You should seek advice from a qualified consultant and actuary before adopting such a plan. This communication is provided with the understanding that Odyssey Advisors is not rendering legal, accounting, or tax advice. To obtain specific advice about your particular situation, please contact Odyssey Advisors for a customized plan design illustration.