Many business owners ask whether they can have two defined benefit plans at the same time. The short answer is sometimes, but the IRS rules can make it difficult.
This article explains when two defined benefit plans can work and when they will be forced together. We’ll cover controlled group and affiliated service group rules in plain English.
We’ll also discuss practical design problems, including nondiscrimination and administrative complexity. The goal is to help you avoid setting up a second plan that creates headaches later.
Background
The key issue is whether the plans must be treated as one arrangement. That determination depends on ownership, employee coverage, and plan design.
The IRS is less focused on how many plans you have and more focused on the total benefit being promised. Benefit limits under Section 415 can restrict the combined payout at retirement.
Deduction limits under Section 404 can also cap what the business can deduct. Even if each plan looks compliant alone, the combined results can create issues.
The real risks are operational, not just paperwork. You can run into deduction limits, benefit limits, and nondiscrimination problems if the designs are not coordinated. Controlled group and affiliated service group rules can pull related entities into the same testing bucket. Even if each plan looks fine alone, the combined result can create failures.
Participation in Other Defined Benefit Plans
It is critical to determine whether the participant has participated in any other defined benefit plans. The maximum benefit payable from all defined benefit plans by the same employer must be aggregated.
The participant has one lifetime defined benefit limit per related employer group. The aggregation rules require considering all defined benefit plans of employers under common control or affiliation.
These rules are complex. If two employers are controlled by the same person, then defined benefit plans offered by those companies may need to be aggregated, even if one plan has already been terminated, to determine the maximum plan benefit.
Example #1: Doctor Working at Hospital With Side Gig
Dr. Carter worked for a hospital for many years and earned a pension from it. The hospital is a non-profit entity that isn’t controlled by Dr. Smith. Dr. Smith then terminates employment and starts a medical practice owned 100% by Dr. Smith.
If Dr. Carter adopts a defined benefit plan, the maximum benefit limit will not be impacted by the benefit Dr. Carter earned under the hospital plan, because the hospital and the medical practice are not related entities under the control group or affiliated service group rules.
Example #2: Successful Entrepreneur
Bill is a serial entrepreneur. Pat previously owned 100% of ABC Company. The company adopted a defined benefit plan in 2000. The plan was terminated when Pat sold ABC Company in 2010.
Bill has started a new business, XYZ Company, which is owned 100% by Pat. If XYZ Company adopts a defined benefit plan, the maximum benefit available under the new plan must be adjusted to reflect benefits payable under the ABC Company plan.
Use EMPARION PLANS on
*Emparion is not affiliated with, endorsed by, or sponsored by these institutions.*
Defined Contribution Plan Limitation
Defined contribution plans are subject to a different maximum benefit limit that takes into account total additions to the participant’s account each year. The defined contribution maximum is not coordinated in any way with the maximum benefit under the cash balance plan—meaning the maximum benefit available under the cash balance plan is not impacted by the existence of another defined contribution plan.
Bottom Line
Running two defined benefit plans is possible, but it is never as simple as “open another plan.” The IRS looks at how the plans work together, who is covered, and who controls the businesses. In many cases, the plans must be tested or aggregated as a single arrangement. That is where unexpected limits and compliance issues usually show up.
If you are considering a second plan, start with a design study before you sign anything. Confirm ownership relationships, employee coverage, and whether the plans should be paired or kept separate.
Then model contributions under multiple scenarios, including growth, hiring, and income changes. With the right structure and ongoing administration, two plans can work without creating compliance headaches.
