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The Pension Protection Act spawns the creation of the
Super 401(k) Plan

By Rob Lambert - Email Editor

Date : March 12, 2009

Dear Valued Reader,

By Roccy M. DeFrancesco, Jr., JD, CWPP™

Learn how you can now Legally Discriminate and Kick-Up Pension Plan Contributions.

Most business owners are not aware of the fact that industry-altering legislation was passed in 2006, called the Pension Protection Act (PPA). What’s so incredible about the PPA? It allows for significantly increased contributions to a tax-deferred retirement plan for business owners and an ability to be even more discriminatory against the rank-in-file employees.

Higher Contributions

After the PPA, the 25% of payroll limit has been dramatically changed. Prior to the act, whether you had a defined contribution plan (401(k)/profit sharing) or a defined benefit plan, your total contributions for all employees could not exceed 25% of payroll. Now, even if you max out a 401(k)/profit sharing plan, you can still add on top of that a contribution to a defined benefit plan (such as a cash balance plan).

Age	401(k) only	401(k) w/Profit Sharing	Cash Balance/Defined Benefit Plan	Super 401(k) Total
65	$20,500	$51,000	$188,000	$239,000
60	$20,500	$51,000	$181,000	$232,000
55	$20,500	$51,000	$138,000	$189,000
50	$20,500	$51,000	$106,000	$157,000
45	$15,500	$46,000	$81,000	$127,000
40	$15,500	$46,000	$62,000	$108,000
35	$15,500	$46,000	$47,000	$93,000
31	$15,500	$46,000	$38,000	$84,000

The changes to the PPA have given rise to what is called a “Super 401(k) Plan” which is code for a maximum contribution plan that uses both a 401(k)/profit sharing plan and a defined benefit plan. Prior to the act, if the 401(k)/profit sharing plan contributions for a business reached 25% of payroll, you could not add on a defined benefit plan to increase contributions. Now, after the act, this is possible; look at the Super 401(k) totals on the right of the chart and see how much more money can now be contributed to a qualified retirement plan.

Flexibility in Contributions

One other significant benefit to the PPA is that it changed the way employers were forced to calculate contributions to defined benefit plans. One of the biggest dilemmas when helping design a “maximum contribution” qualified retirement plan is what to do when you have an older business owner who’s not terribly interested in contributing to a retirement plan and a younger owner who very much wants to “max out” a plan?

Prior to the PPA, when using a defined benefit plan, by design the older you are, the more money an employer must contribute to the plan. For example, if you had two business owners both earning $500,000 a year, if the younger owner (45-years old) wanted to tax-defer $81,000 to the plan this year and the older owner (age 60) only wanted to contribute the same $81,000, you were in real pickle. As the table indicated above, the older business owner’s calculated contribution would be $181,000 which is much higher than the $81,000 the younger owner wanted to contribute.

Under the PPA, you can now choose to equalize the values. Therefore, even a 65-year old business owner could have the same level benefit as a 35-year old. This is a very positive change to the laws which makes using a defined benefit plan or a Super 401(k) Plan much more viable.

Summary

If you are looking to maximize contributions to an income tax-deferred qualified retirement plan, there is no better time to do so with the passage of the PPA. The PPA allows for higher contributions and more flexibility in design (which also allows for designs that allow you to legally discriminate in favor of highly-compensated employee owners).

If you have not been approached by your pension consultant to discuss your planning options under the PPA, you should have and I recommend that you become proactive and take steps to find out how the PPA can help you craft a more business owner-friendly plan.

Until next week,

Roccy M. DeFrancesco, JD,CWPP, CAPP, MMB

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