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Case of the Week: Contribution Limits for Combined DB/DC Plans

Case of the Week

The ERISA consultants at the Retirement Learning Center Resource regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings plans. We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with a financial advisor from Rhode Island is representative of a common inquiry related to an employee covered by two plans. The advisor asked: 

“I am meeting with a new client who has a defined benefit plan and would like to add an ‘individual k’ plan. Can he do this and, if so, what are the contribution limitations?”

There are several layers to consider in your client’s situation. First, keep in mind that an “individual k” plan is a type of 401(k) plan that is designed to cover only small business owners and their spouses, (i.e., businesses without eligible common-law employees). 

To answer your question, yes, a business owner can have both a 401(k)/profit sharing plan and a DB plan. The question on contribution limitations depends on whether the DB plan is covered by the Pension Benefit Guaranty Corporation (PBGC), the governmental entity that insures private sector DB plans.

The PBGC insures most private-sector (i.e., non-governmental) DB plans [see ERISA 4021(a)]. There are some notable exceptions to coverage, however [see ERISA 4021(b)]. The PBGC does not insure the following types of plans:

  • Small professional service plans
  • Substantial owner plans
  • Certain Puerto Rico plans
  • Certain church plans

Please see the PBGC’s definitions for the above listed exemptions on the PBGC’s website at PBGC Insurance Coverage.

When a DC and a DB plan are combined, and the DB plan is covered by the PBGC, there is no combined contribution limit. The deduction limits for contributions to DC and DB plans apply separately. A business owner, in this case, can fully contribute to both a DC and a PBGC-covered DB plan within the prescribed limits for each plan.

In the case at hand, one must be mindful of the substantial-owner exemption from PBGC coverage. A private-sector DB plan is exempt from PBGC coverage if it is established and maintained exclusively for substantial owners of the plan sponsor (i.e., if all participants are substantial owners). 

A participant is a substantial owner if, at any time during the last 60 months, the participant:

  • owned the entire interest in an unincorporated trade or business; or
  • in the case of a partnership, is a partner who owned, directly or indirectly, more than 10% of either the capital or profits interest in such partnership; or
  • in the case of a corporation, owned directly or indirectly more than 10% in value of either the voting stock or all the stock of that corporation.

Where a DC and DB plan are combined, and the DB plan is not covered by the PBGC – as would be the case in an owner-only situation – then there is a combined contribution limit. If there is an employer contribution to the DC plan, then the maximum deductible contribution to both types of plans combined is the greater of either:

  • 25% of the aggregate compensation of all participants; or 
  • the amount necessary to meet the minimum funding standard for the DB plan. 

Consequently, the plan sponsor would fund the DB plan up to the required amount, and then fund the DC plan if there is still room.

For this purpose, the IRS says the first 6% of deductible contributions made to the DC plan is ignored for the above limits, and salary deferrals to the 401(k) plan are not counted toward the deduction limit. 


Determining the maximum deductible contribution that a plan sponsor can make to a DB and DC plan that are combined can be tricky. Business owners should always seek advice from their tax advisors when calculating plan contribution limits. 

Any information provided is for informational purposes only. It cannot be used for the purposes of avoiding penalties and taxes. Consumers should consult with their tax advisor or attorney regarding their specific situation. 

©2019, Retirement Learning Center, LLC. Used with permission.