I have heard that my profit-sharing contribution is limited when I have a defined benefit plan. Why is this?

Many people do not realize that when a 401(k) profit sharing plan is combined with a cash balance plan, the profit sharing contribution amount will decrease.

A standalone 401(k) plan allows for a profit-sharing contribution up to 25% of compensation. However, when a cash balance plan is combined with a 401(k) profit sharing plan, the profit sharing contributions are limited as follows:

1. An overall employer contribution of up to 31% of compensation. This would include a total of all the cash balance contribution, Safe Harbor Match/Non-elective contribution and the profit-sharing contribution.
2. The employer contributions within the 401(k) plan cannot exceed 6%. This would include the total of all Safe Harbor Match/Non-elective contribution and the profit-sharing contribution.

Typically for an owner looking to maximize their contributions for a plan year, we calculate funding amounts that will follow the 6% limitation within the 401(k) plan. This allows for a greater cash balance plan contribution.

A combo plan is still subject to nondiscrimination and compliance testing, not just the combined plan limitations. This will also influence the contributions and allocations for each participant. Our actuary must calculate and certify the amounts each year to ensure the combination meets qualified plan requirements.