AndyH

I haven't had time to look up a cite, but that is certainly my understanding, that you cannot pass on the cost as anything other than a general expense of the trust (which could be paid from plan assets but not debited from anyone's entitlement).

Weren't those great commercials! P.S. Great link!

Company sponsors DB plan with 45 employees covered, 8 of which are HCEs. I want to consider adding a profit sharing plan covering just 2 owners, and aggregating for 401(a)(4) and 410(B). I've already determined that below a certain DC contribution level the general test will pass. What other issues should be considered? Seems to me this will not be subject to the DB/DC gateways since the combined plan is primarily db in nature (less than 1/2 of NHCEs benefit more from DC). 404 will not be a problem because the combined contribution will not approximate 25% of pay. What about benefits, rights, and features? If the DC plan is self directed, and the only two participants are HCEs, is this a problem? Any other BRF issues? Other issues? This situation would be in lieu of a QSERP because I want the extra contribution to be completely discretionary.

Good point. We had a solution for that, which was an amazingly efficient failsafe provision, which was in almost all of our (non-takeover) plans. But, now with the GUST restatement process, the IRS has required that we remove the failsafe language, so your point is a good argument in favor of discretionary class plans. Thanks. PS, By the way Sal Tripodi sells a package of cross tested language and commentary, which we purchased. I think it is outstanding. Lots of great insights. For example, it has suggested design for super integrated plans under the gateway rules using discretionary class plans. And much more stuff I found very insightful. I recommend it highly. Just came out a few weeks ago.

Amazing insight. A EF H p! Another EF Hutton post!

But, pax, it's a cash balance plan, not a db plan, so 401(a)(26) was repealed! (Only kidding, but that could be the thought process of these "creative" partners) What does BTW stand for, anyway?

Both answers are enormously helpful, thank you. You've reinforced what I thought, and what was consistent with the DC cross testing rules, but as Doug alluded to there doesn't seem to be anything that specifically says this for the DB/DC combo. And, Mike, I didn't realize that you could average the DB NHCE rates-that certainly would make things easier. I can look this up, but do you know off hand how you combine the DB and DC rates? Do you take the PV of the accrual, or is it just the db accrual rate? For example, if the DB accrual was 1% of pay, does this make the DC gateway 6.5%, or is the accrual converted to a present value?

In a 2002 DB/DC combo where the DB is not the dominant plan and the pv of the DB for the HCEs is high enough to make the gateway requirement be 7.50% of pay, who gets the 7.50%? Is it just people eligible for a contribution, or is there something that requires that all non-statutory excludables be included? Example, I have one where only certain classes of employees are included in both a DB and DC plan. In the recent past, a DC contribution of 5.5% of pay was needed to pass 401(a)(4) and 410(B). As I understand it, the 5.5% needs to be increased to 7.50% to pass the gateway. Is that all? Do I need to bring any employees that I didn't need to include before (if not needed for testing)? For example, what about participants in the DC plan who terminate before the plan year end (assume a last day requirement)? Do they need to get 7.50% if before they would get nothing?

Richard, under 410(B) you've got either 2 or 3 plans. You have a DB which may or may not be aggregated with the discretionary profit sharing. So that's either 1 or 2 plans for 410(B). They you have the 401(k) which must be tested separately as if it were another physical plan document. The 401(k) will not pass coverage. It cannot be aggregated with anything else. So, Tom's right. The failing code section is 410(B) on the 401(k) side and you may or may not have 410(B) problems with the portion of the "plan(s)" other than the 401(k). If you aggregate the DB and the PS, you'll pass 410(B) but then you'll have to pass 401(a)(4) as well.

Thanks, all for the comments. I happen to agree with each of you, and these experiences will be helpful. I'm trying to convince others.

Here's the question posed a different way. How do you allocate a contribution in a time effective manner if there are few rules? Assume for a moment you were doing new comparability allocations/testing for a mutual fund company. Where do you start in terms of allocations if there are no rules other than the gateways, the groups, and the 415 limits? What questions do you ask? And, actuarysmith, there are advantages to having formulas in the document. The number of unknowns are less. Once you have either a dollar contribution or a clear objective, the allocations are easy. There is no back and forth. I am trying to argue that the flexibility of discretionary class plans outweighs the increased time expenditure that might be caused by more back and forth, and I'm looking for supporting arguments. I agree this is no big deal with small closely held plans, in the manner that mwyatt suggests. But not all plans fit this model. I have to deal with lots of plans with 4 or 5 classes that don't fit the "give me the max and minimize everybody else" mold, so I'm looking for suggestions.

Please elaborate, IRC401. ???

Richard, don't forget about the 25% deduction limit. You might just want to have one age weighed ps/k plan with a safe harbor nonelective to minimize the risks. And, Tom, nice angle on this. Just a little too "high maintenance" for me, but quite interesting.

No, not for ADP. Whoever told you that was wrong.

No. If you aggregate the plans for a(4), then you're aggregating them for 410(B) and ADP testing as well, so you've got a 0% NhCE deferral average, and your HCE limit is also 0%.

I'd like to hear from people experienced in discretionary class plans and client communications regarding same. I've worked mostly with cross tested plans with hard wired formulas and am trying to get a large block changed to discretionary class plans. One downside would seem to be that more back and forth might be required with clients before the desired allocations are finalized and tested. How is this typically approached when there are multiple groups? Is it efficient to have written guidelines in terms of how relative contributions are determined, i.e. class two gets 1/2 of class 1 and class 3 gets 1/3 of class 1? The context is not a small, local-only operation where regular client meetings are held. I'm talking about a wide geographical spread of clients. What are people's experiences with how to make this process most efficient? All opinions are welcome.

How do cash balance plans address the restriction issue?

Well, in practice, my company, for one, denies the lump sum option unless the conditions are satisfied. A restricted HCE has the option of a lump sum provided all the conditions (bonding/escrow, etc) are met, an annuity option available under the plan, of deferred payment until a later date (subject to 401(a)(9) of course). We have allowed someone who elected under these conditions an annuity option to re-elect upon plan termination when the restriction is lifted on the basis that this is an additional form of benefit option (payment at plan termination and unrestricted lump sum).

Wouldn't this stuff have to be an option in the plan? What happens if the person get's a year or two of the unrestricted amount, then dies? This stuff sounds great, but how is it following the terms of the document? And, again, what happens if the person dies?

Yes. 1.(401)(a)(4)-8(B)(2)(i) defines the EBAR as the increase in the balance divided by years benefitting, expressed as either a dollar amount or a percent of average annual comp. Average annual comp is defined in 1.401(a)(4)(3)(e)(2) and in subsection (ii)(A) it says Plan Year comp may be substituted for average annual comp if the measurement period is the current plan year. Plan Year comp is defined in 1(401)(a)(4)(12), which says that Plan Year comp means section 414(s) comp during one of the periods described further in (2)-(4), and (4) says you can use comp during the period of participation. So, it looks like this is limited to the annual method, and it also appears that comp must be plan year comp (measured during the plan year), not another 12 month period. But, I think it's clear you can use any definition of comp that satisfies 414(s), including different definitions for different disaggregated component plans if applicable. But Richard's point about checking the document is a good one; sometimes the document does state the methodology.

Yes, you can either use full year or from date of participation. Either way is acceptable for testing.

You are correct about the 404 limits. The deductible limit is the greater of 25% of pay or the amount required to fund the DB. The deferrals are not counted in this, effective 1/1/2002. I'm not sure about the catch up deferral, but I don't see why not.

Mike, I just re-read your long thread. Are you saying that you don't believe that each component plan must have a ratio/percentage of 70% even if the members are cherry picked, or did I misunderstand you? If so, could you elaborate? I haven't read or heard this opinion, although I have seen some dance around the question.

Richard, my version is the 5th edition, copyright 1999. The article starts on page 579. It's tough to find materials that address these issues as in as much depth. It's titled "Planning Opportunities to Maximize Benefits for Key Employees Under Qualified Defined Benefit Plans", but it covers cross tested DC plan testing as well. Well worth locating. And, let's thank Mike Preston for lending his expertise to the discussion as well. Kind of like the old EF Hutton Commercials, "when EF Hutton speaks, people listen".

[this was written before I saw Mike Preston's comments] On the point in question, I have in front of me a detailed example of rate group determination with two component plans. The rate group percentages clearly include all NHCEs and all HCEs in each component plan. It's written by Maria Sarli and Dennis Coleman of Kwasha Lipton, and it is a reprint of an article from Tax Management Compensation Planning Journal 8/5/94. It's part of the required reading for ASPA's C-4 exam, included in an ASPA publication "Current Topics for the Retirement Plan Consultant". So, right or wrong, it seems clear that there are different interpretations to this particular issue.