What Is a DB/DC Combination Plan and How Does It Work?
A DB/DC Combination Plan, also called a Defined Benefit and Defined Contribution combo, integrates two retirement plans: a Defined Benefit plan (such as a Cash Balance plan) and a Defined Contribution plan (such as a 401(k) Profit Sharing plan). This structure allows business owners to make higher, tax-deductible contributions while keeping employee costs manageable and ensuring full IRS compliance.
Why Do Business Owners Use a DB/DC Combination Plan?
Business owners use a DB/DC Combination Plan to maximize retirement savings and reduce taxable income. By combining a Defined Benefit plan with a 401(k) Profit Sharing plan, owners can make significantly higher pre-tax contributions while meeting IRS nondiscrimination requirements. This approach rewards ownership and key employees while maintaining fairness for all staff.
Do All Employees Have to Participate in the Defined Benefit Portion of a Combination Plan?
Not always. In most cases, only some employees need to be included in the Defined Benefit plan to satisfy IRS Section 401(a)(26), which requires at least 40 percent of eligible employees to receive a meaningful benefit. Many staff members instead receive contributions through the 401(k) Profit Sharing plan, keeping the overall plan compliant and cost-effective.
Can DB/DC Combination Plan Contributions Change Each Year?
Yes. Employer and employee contribution amounts can change annually based on plan design and business profitability. Some contributions are required to meet minimum funding levels under IRS rules, while others are discretionary. Your plan document outlines how contributions can adjust each year to remain compliant and tax-efficient.
Can You Take a Loan from a DB/DC Combination Plan?
Loans are generally available only from the Defined Contribution (401(k)) portion of a Combination Plan, if the plan allows it. Defined Benefit plans typically do not permit loans. All loans must follow IRS repayment rules, and unpaid balances may result in taxes and penalties.
How Much Can Business Owners Contribute to a DB/DC Combination Plan?
Contribution limits depend on age, income, and plan type, but owners can often contribute well into six figures annually, far exceeding standard 401(k) limits. The IRS updates these limits each year to reflect inflation and policy changes.
What Are the Tax Benefits of a DB/DC Combination Plan?
Contributions made to both the Defined Benefit and Defined Contribution components are tax-deductible to the business and grow tax-deferred for participants. This structure helps high-income earners lower current taxable income while funding long-term retirement security.
Are DB/DC Combination Plans Compliant with IRS and DOL Regulations?
Yes. Combination plans undergo annual nondiscrimination and coverage testing to ensure compliance with IRS and Department of Labor standards. Nydia Retirement Solutions’ in-house actuaries perform all testing, filings, and certifications to maintain compliance year after year.
What Types of Businesses Benefit Most from Combination Plans?
Combination plans are ideal for profitable professional service firms, such as medical, legal, or accounting practices, with fewer than 50 employees and consistent annual revenue. They allow owners to contribute more toward retirement, reduce taxable income, and offer competitive benefits to attract and retain top talent.
What’s the Difference Between a Cash Balance Plan and a Traditional Defined Benefit Plan?
Both are forms of Defined Benefit plans. A Cash Balance plan expresses benefits as a hypothetical account balance that grows annually, making it easier for employees to understand. A traditional Defined Benefit plan promises a fixed monthly payout at retirement based on salary and years of service. Both are eligible to pair with a 401(k) Profit Sharing plan in a DB/DC Combination structure.