A sole proprietor has a defined benefit plan with a minimum funding requirement of more than 25% of compensation. Can deductible contributions be made on the proprietor’s behalf to a defined contribution plan as well?
Rev. 12/05/03, E-mail Alert 2003-23 Updated 12/29/08, Rev. 07/23/09, E-mail Alert 2009-11

Yes, up to 6% of compensation. Also, elective deferrals are not included in the 25% deductible defined contribution limit, the sole proprietor may contribute the maximum elective deferral amount for the year to a 401(k), including, if applicable, catch-up contributions.

Example
A sole proprietor age 59 employing two younger NHCEs has a defined benefit plan and a deferral-only 401(k) plan (since deferrals are not included in the deduction limit). Due to the size of the sole proprietor's plan, it is exempt from PBGC coverage because the PBGC exempts from coverage plans of less than 25 employees that are professional firms. For the sake of this example the sole proprietor is a dentist.

According to PPA, for a DB plan that is not part of the PBGC, the allowable deduction limit may exceed the 25% limit that applies to combined DB and DC plans if no more than 6% of compensation is contributed to the DC plan. Therefore, at the end of 2008, the employer decides to amend the 401(k) for 2009 and add an enhanced safe harbor matching contribution formula of $/$ on the first 6% deferred. (Note that the DB numbers are hypothetical and not based on actual actuarial calculations.)

Prior to PPA, the sole proprietor would have been limited to a tax deduction of $78,000 for the DB. (The greater of 25% or the DB minimum funding requirement.) After PPA, the deduction for employer contributions increases to $96,000 with the allowance of a 6% defined contribution plan deduction. Of the additional $18,000 contribution made to the DC plan, the sole proprietor's portion is $13,500.