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Plan Insight

MAY 2010 Newsletter

DB(k) Plans

The Pension Protection Act of 2006 (PPA’06) provided for the development of a new ‘hybrid’ plan type – the DB(k). Beginning in 2010, an employer may adopt an "eligible combined plan." Consisting of a defined benefit plan and a 401k plan held in a single trust, using one plan document, one summary plan description, one Form 5500, and one audit (if required). The DB(k) plan may be used only by employers with no more than 500 employees.

For plan sponsors, the new retirement hybrid will function as a single trust, offering efficiencies never before available. Sponsors will be required to file a single Form 5500 with the federal government, for example. For those companies that already offer the typically costly-to-fund defined benefit plans, the new model offers a way to reduce their responsibility, while not eliminating the benefit to employees completely, said Dallas L. Salisbury, president and chief executive of the Employee Benefits Research Institute in Washington.

That doesn’t mean they come cheap. Like traditional pensions, DB(k)s requires a significant funding commitment on the part of the employer, and are best suited to companies with high profit margins or those flush with cash. But sometimes, it’s worth the investment in recruitment and retention, especially in hard-to-staff fields, or those subject to widespread worker poaching.

The DB(k) would be deemed NOT top-heavy or subject to non-discrimination testing where it meets specific safe harbor formulas for both the DB and the 401k elements of the plan. The DB component is either a 1% of final average pay formula for up to 20 years of service, or a cash balance formula that increases with the participant's age. The 401k component must provide automatic enrollment and a fully vested 50% match on the first 4% of deferred pay.

For small companies especially, if you have a different retirement package than your competitors, you can have a better opportunity to hire high-quality workers, said David L. Wray, president of the 401(k)/Profit Sharing Council in Washington. Adoption of the plans will be slow, experts agreed. Wray noted that professional firms, such as doctors and lawyers offices, most often are the types of small businesses to offer pension plans, making them a potential target for the new hybrids.

 

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Information is provided for review and consideration only. Please consult legal and tax advisors for practical advice pertaining to your business and personal situations.

This page was last reviewed and/or updated on Monday, December 19, 2011 04:17 PM

 
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