Beginning January 1, 2010, businesses with 500 or fewer employees could offer a new plan called a DB(k). The DB(k) was authorized by Congress as part of the 2006 Pension Protection Act. The DB(k) melds a 401(k) savings plan with a small guaranteed income stream. The key elements of the plan:
- A defined benefit equal to 1 percent of final average pay for each year of the employee’s service, up to 20 years.
- An automatic enrollment feature for the 401(k) portion. Unless an employee specifically opts out or changes the contribution level, 4 percent of pay is automatically shunted into 401(k) savings.
- An employer match of at least 50 percent of employee 401(k) contributions, with a maximum required match of 2 percent of pay.
Part of the thought process behind the DB(k) was the reduction of administrative costs of having a separate DB and 401(k) plan for the small employer. Utilizing a DB(k) will allow for the utilization of one plan document, and one 5500 filing requirement which effectively allows the employer to save money on these administrative expenses.
The current design of the DB(k) seems to only make sense in situations where the only employees are an owner and his spouse, or an owner and his children(with lower compensation), and in some situations an owner and one additional lower paid non-family employee. In all other situations, there will most certainly be a better plan design with a separate DB and 401(k) plan that will provide cost savings on the employer contribution that far outweighs the administrative cost savings of a DB(k) plan. If you have any questions regarding DB(k) plans, be sure to discuss them with your financial advisor.