Remember DB(k) plans?
If you were in the retirement plan business back in 2006, you probably do. If you’re new in the business, you may not know about them at all.
A DB(k) Plan, formally called an “Eligible Combined Plan”, is a hybrid retirement plan that was created by Congress as part of the Pension Protection Act of 2006 under Section 414(x) of the Internal Revenue Code.
The idea behind DB(k) was simple. By combining a defined benefit plan and a defined contribution plan, a “small employer” (at least two but less than 500 employees) could potentially reduce the cost and administration requirements of maintaining two separate plans. The two components of the DB(k) have to be generally structured as follows:
1. Defined Benefit Component
- An employee must receive at least 1% of pay for each year of service, not to exceed 20 years.
- Benefits must be fully vested after 3 years of service.
2. 401(k) Component
- There must be an auto-enrollment provision with a 4% contribution rate unless the employee elects to reduce this rate or opt-out.
- The employer must match 50% of the employee’s 401(k) contributions, up to 4% of compensation, or a 2% maximum match.
- Employees must be fully vested in the matching contribution when made.
There are still certain general non-discrimination requirements that have to be met, but the plan automatically satisfies the 401(k) and top-heavy requirements.
Sounds intriguing, yes? An employer could have streamlined plan administration with the plan being treated as a single plan for annual Form 5500 reporting.
But after the January 1, 2010 effective date for Section 414(x), DB(k)s didn’t take off. Since then, there have been very few DB(k) sightings.
It wasn’t a case of DB(k)s being a bad idea. Rather, right from the start, DB(k)s had to overcome some difficult hurdles.
First, the Internal Service in Revenue Procedure 2011-6 announced it would issue determination letters for DB(k) Plans under the following conditions. Even if one or both components utilized pre-approved plan documents, the IRS considered the DB(k)Plan to be an individually designed plan. This meant that in order to receive a Determination Letter as a qualified plan, the employer would have to submit the DB(k) Plan with two Form 5300s, one for each component, and 2 user fees.
Second, for many small employers, the math simply didn’t work. Using existing tax law, two separate plans, a traditional defined benefit or cash balance plan paired with the 401(k)plan, could provide larger benefits and contributions to the owners and highly compensated employees.
Third, the expectant reduction in administration expenses didn’t materialize in many cases. As noted above, only one Form 5500 has to be filed for the DB(k), but the two components still have to be administered separately. An actuarial valuation still had to be done for the defined benefit component, and administration still had to be done for the 401(k) component.
Let’s not consider DB(k) plans a failure. They were an innovate attempt to address the critical problem of adequate retirement income for employees. We should encourage more innovation with that objective.