In Notice 2009-71, the IRS announced that it plans to issue guidance on the new combined 401(k)/defined benefit plans, permitted under Section 414(x) of the Internal Revenue Code. Section 414(x) was added to the Code by the Pension Protection Act of 2006, and becomes effective after 2009. The combined plan is intended to be a vehicle through which an employer can maintain both a 401(k) plan and a defined benefit plan in a single plan, reducing the administrative burdens and costs of maintaining 2 separate plans. For example, only a single Form 5500 must be filed for the combined plan.
Generally, under Section 414(x), an employer will be eligible to establish a combined plan only if it is a “small employer”, that is, an employer who, taking into account the aggregation rules of Section 414 of the Code, employed an average of at least 2 but not more than 500 employees on each business day during the preceding year and at least 2 employees on the first day of the current year. The defined benefit portion of the combined plan must provide each participant with an annual benefit which is not less than the “applicable percentage” of his or her “final average pay”. The applicable percentage is 1 percent multiplied by the participant’s years of service with the employer, up to 20 percent. Final average pay is determined using the period of consecutive years (not exceeding 5) during which the participant had the greatest aggregate compensation from the employer. A participant must be fully vested in this benefit after completing 3 years of service.
The 401(k) portion of the combined plan must offer an automatic contribution arrangement, that is, an arrangement in which an employee automatically participates and makes elective deferrals, unless he or she affirmatively elects otherwise. If an employee automatically participates, he or she will make elective deferrals at the rate of 4 percent of pay. The employee can elect to change this rate, or to stop making elective deferrals altogether. In addition, the employer must make matching contributions to the plan, for each participating employee, equal to 50 percent of the employee’s elective deferrals, to the extent that the elective deferrals do not exceed 4 percent of pay. The employer may make the matching contributions at a higher rate, but subject to certain conditions. Also, the employer may make nonelective contributions to the plan. An employee must immediately be fully vested in his or her elective deferrals and in any matching contributions that he or she receives, and must be fully vested in any nonelective contributions that he or she receives after completing 3 years of service.
Certain notice and other technical requirements apply to the combined plan under Section 414(x). In Notice 2009-71, the IRS requests comments regarding possible issues to be addressed in guidance to be provided for Section 414(x). The comments are due by October 15, 2009.