For those trying to devise defined benefit (DB) and hybrid defined benefit/defined contribution (DC) plans that fall under the employer deduction rules of the Pension Protection Act (PPA) of 2006, there is a thicket of information to wade through and interpret.
During a Webcast sponsored by the American Society of Pension Professionals & Actuaries (ASPPA) in late October, Joan Gucciardi of Gucciardi Benefits Resources, a division of Summit Benefit & Actuarial Services, and IRS actuary Marty Pippins discussed some differences between the old rules and new reforms for hybrid and DC plans under the PPA, noting that some reforms still need more IRS clarification.
Under the pre-2006 deduction rules for DC plans, there is a primary limit of 25% deductibility of total compensation paid to all participants in the taxable year or the amount of contributions made to or under the trusts or plans to the extent such contributions do not exceed the amount of employer contributions necessary to satisfy the Act’s minimum funding standard for retirement plans for each plan year. But under the new law, and effective for tax years beginning 2006, the maximum deduction for DB plans is generally 150% of current liabilities minus plan assets.
Hybrid plan deduction limits don’t apply if the DC contributions portion does not exceed 6% of an employee’s compensation. If they do exceed 6%, then IRC 404(a)(7) comes into play. This section of the tax code governs deduction for contributions to a trust or annuity plan. This is an area of some controversy, according to Gucciardi, and plan sponsors will have to monitor IRS guidance for more feedback.
Pippins said the IRS does intend to address 404(a)(7) applicability to DC contributions exceeding 6% of pay in published guidance by the end of the year. He noted that the 150% rule is effective retroactively to 2006.
The key words are “to the extent that” such contributions exceed 6% of compensation paid or otherwise accrued during the tax year, Pippins said. The law’s language uses “that,” and not “if.” You can still get a deduction of 6% for DC plans and then the 404(a)(7) limit applies, but you do not lose that deduction for the first 6% of deduction applied, Pippins said.