DB(k) Is Not the Same as a Cash Balance Plan

The Pension Protection Act of 2006 added Code Section 414(x) effective for 2010. The type of plan added by PPA of 2006 is called a DB(k) or "eligible combination plan".  You will start to hear more and more about this type of plan in the next couple of years.  We just wanted to make sure you know that this is not what our blog is about.  We are using this blog to educate you on Cash Balance Defined Benefit Plan in combination with 401(k) Plans.


The DB(k) melds a 401(k) savings plan with a small Defined Benefit promise. It contains:

(1) A defined benefit equal to 1% of final average pay for each year of the employee's service, with up to 20 years of service counted - so somebody with 20 years of service could earn a 20% of pay retirement benefit;

(2) An automatice enrollment feature for the 401(k) portion. Unless an employee specifically opts out or changes the contribution level, 4% of pay is automatically set as the employee's level of salary deferrals;

(3) An employer match of at least 50% of employee contributions, with a maximum required match of 2% of pay.

As you can see, the new DB(k) is very defined and lacks a certain amount of flexibility, but it might be attractive to certain employers. However, the IRS is just now asking for comments from the pension industry as to these types of plans to help them write the rules pertaining to them. I would guess that regulations will not be published any time soon and therefore none of the retirement plan documents providers will be able to develop plan language to implement these plans until a few months after the regulations are published. So, it might be 2011 before these plans can actually start being utilized.

We will keep you informed about the DB(k) option as it develops.
 
We would characterize the new DB(k) as a minimal 401(k) plan combined with a minimal DB plan - all in one plan document.  We would characterize the 401(k) Cash Balance Combo arrangement discussed in this blog as a maiximum 401(k) combined with a separate and maximum Cash Balance plan - in two separate documents.  We just did not want you to get confused when others starting sending you data on the new DB(k) - it is NOT the same maxed-out attractive plan approach we can provide through the 401(k) Cash Balance Combo.

401(k) Cash Balance Plans - the Basic Concept

In very simple language, adding a Cash Balance Plan to supplement an existing 401(k) Plan allows the high income business owners and professionals to contribute substantially more money on a pre-tax basis to their retirement plans.

Example, for 2009, the maximum contribution for a high income business owner to a 401(k) plan is $54,500, assuming they are age 50 or more by 12/31/09.  The would normally be accomplished by having a Safe Harbor Cross Tested 401(k) Plan.  But, in the right circumstances, you can add a Cash Balance Plan and put away $100,000 to $150,000 (or more) additional for the older business owners without raising the cost of contributions for the support staff significantly.

That's it, in a nutshell - let high income business owners shelter $100,000 to $150,000 more than they can do with a 401(k) Plan alone without normally having to increase contributions for support staff significantly.