Ask the Experts!

The professionals at Advanced Underwriting Consultants (AUC) answer the tax questions posed by producers.  Here’s the question of the day.

Question: I am working with a group of doctors that has an existing 401K plan, and wants to implement a defined benefit plan as well.  How will the employer’s contributions to a defined benefit plan potentially reduce the normal 401K account contribution limits?

Answer: If you are dealing with a large employer, and they implement a typical defined benefit (DB) plan in addition to the company’s 401K plan, then there’s usually no issue. The employer’s DB contribution does not affect the individual’s ability to do either $16,500 or $22,000—depending on age–of salary deferral.  It’s only when both plans call for a maximum employer provided benefit that combined plan limitations come into play.

If you have a situation such as a group of doctors operating a professional medical practice and they want to set up both a defined benefit plan providing the maximum benefit and a defined contribution (DC) plan (like a 401K plan) providing the maximum benefit, then there are practical combined plan limitations.  The combined plan limit is extremely complex to calculate, and almost beyond easy understanding for anyone other than an actuary.  The short, slightly inaccurate description is that the employer can contribute an amount that is essentially equal to either the DB maximum or the DC maximum, but not both.

In general, a business may not deduct more than 25% of the company’s aggregate payroll as a business expense for pension contributions.  If the company can’t deduct the premium, it usually makes no economic sense to make a contribution.

In this case, it’s best for the doctors to have an actuary calculate the amount of employer contributions that would be needed for the defined benefit plan, and see if there’s a problem with the 25% of payroll limit.

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