Can I Sponsor More Than One Retirement Plan?

Yes. The Pension Protection Act of 2006 has fundamentally altered the ability of an employer to sponsor more than one retirement plan. This Act built on the greatly relaxed deduction limits of the 2001 Tax Act, and adds some interesting possibilities. However, limits must be respected as excess contributions will not be deductible.

Let’s take a closer look at the rules, because there are three possibilities:

1. Two Defined Contribution (DC) Plans (i.e., a Money Purchase Pension and a Profit Sharing Plan).

Before the tax law was changed in 2001, it was common for a small-business owner to sponsor two plans. That’s because profit sharing plans were limited to 15% of the eligible payroll, but other DC pension plans were allowed up to 25% of pay. Today, profit sharing plans allow up to 25% of the eligible payroll to be deducted in a single plan. Thus, it is no longer recommended that a combination of money purchase and profit sharing plans be maintained because it should be less expensive to achieve the same objective in one profit sharing plan.

2. A 401(k) Plan with another Defined Contribution Plan (i.e., a 401(k) Plan with a Profit Sharing Plan).

It should be noted that 401(k) plans are actually a subset of profit sharing plans. Rather than sponsoring two separate plans, consider whether a single 401(k) profit sharing plan can suffice. Such a design can allow for salary deferrals PLUS matches and profit sharing contributions that do not exceed 25% of the eligible payroll.

3. 401(k) and Profit Sharing Plans. For premiums paid with ongoing contributions, see defined contribution plans. However, some 401(k) and profit sharing plans, including SAI prototype plans, include “aged money” features that waive the limit for certain monies in the plan.

• · There are three exceptions:
• · Five Year Rule. If a participant has been in the plan for more than five years, there is no limit on the life insurance purchase within his or her account if only profit sharing monies are used.
• · Two Year Rule. Any employer-paid profit sharing monies that have resided in the plan for at least two full years may be used without limit.
• · Rollovers. Amounts that you rolled into the 401(k) or profit sharing plan (e.g., from IRAs) can be used without limit.

• This third provision has become broadly available as the 2001 tax act greatly expanded the portability of pension proceeds. For example, you can now roll over 403(b) funds into your profit sharing plan and tap any of these monies to secure life insurance if you have a need.

4. Defined Benefit (including Fully Insured or Cash Balance Plans).

There are two rules that the plan sponsor selects from to determine the maximum survivor benefits allowed under the plan:

• · 100 Times Rule. Life insurance of up to 100 times the expected monthly retirement benefit at Normal Retirement Age may be purchased.
• · Revenue Rule. 74-307 Method. This somewhat complex method determines a “Theoretical Level Premium” (TLP) that is actuarially calculated. Up to 66 2/3% of the TLP may then be used to buy whole life insurance, and up to 33 1/3% may be used for universal life or for policies with term riders. Although this method often provides for more life insurance than the 100 Times Rule, the comparison will vary widely based on age and expected plan contributions