CrossTested DC w/ a DB plan

[dmb]

Does anyone know where I can find some info (such as discrimination testing) regarding setting up a Cross-Tested PS plan along with a Defined Benefit Plan. Thanks.

[AndyH]

Please be more specific with your question. It's very broad. If you're asking about how to test a cross tested plan when you have a DB, the 401(a)(4) regs will be needed. You'll need to aggregate the DB accruals with the DC allocations or benefits.

Not a lot of fun.

[dmb]

I'm trying to design a cross-tested profit sharing plan and a defined benefit plan. I guess I have a few questions. Would I set up the PS plan first and then set the DB up to get to the 25% 404 limit or vice versa?? When testing, do I test both plans on a benefits basis and combine the accural rates??

[AndyH]

First, the deduction limit is the greater of the DB required contribution or 25% or payroll, so if the DB contribution exceeds 25% or payroll, the profit sharing plan is useless.

The cross tested ps would only be beneficial if the DB contribution drops below 25% or pay. But, then you've got a major hassle (in my opinion) by needing to aggregate the benefits and contributions. Usually, if a cross tested plan works, you would combine the EBARS and the DB accruals, i.e. test both on a benefits basis.

But, this isn't always true. It is often beneficial to split the group into two and test one part on a benefits basis and one part on a contributions basis.

This all depends on the demographics.

But, if you have a DB contribution in excess of 25%, this exercise is useless since you can't deduct profit sharing contributions.

[dmb]

Thanks for the input. The cross tested profit sharing works with a full 15% contribution. I was going to then set up the DB plan to fund for the other 10%. Obviously, after the first year, there will be some give and take between the plans with regard to the contribution split.

As far as testing goes, can I test the plans separately??? I thought the plans had to be aggregated for non-discrimination testing.

Thanks again.

[Richard Anderson]

If the plans pass coverage separately, then they may be tested separately for non-discrimination. If they must be aggregated to pass coverage, then they must be aggregated when testing for non-discrimination.

[AndyH]

No, I don't agree. That is true if they are both safe harbor plans, but a cross tested plan is not a safe harbor. It must be general tested. When general tesing, both DB and DC plans must be included in the test if one of them is cross tested.

For example, if you have a profit sharing plan that is not a safe harbor, i.e. it is general tested, the DB must be included if the profit sharing plan is tested on a benefits basis (i.e. cross tested), but need not be included if the ps plan is tested on a contributions basis.

[Tom Poje]

somewhat true, but maybe you could of worded it better.

If you have both a DB and a DC plan, you are allowed to have two Average Benefits Tests - one for the DB and one for DC.

However, the DB must be on an accrual basis, and the DC must be on an allocation basis.

If you have a non safe harbor plan, you must use the general test to prove nondiscrimination. This does not require you to cross test, though chances of passing are pretty slim at that point. Conceivable you could have a class plan where a group of NHCEs receive the same % as the HCEs and you might be able to pass by testing on an allocation basis.

[dmb]

I had a thought: With the new 25% of comp deduction limit for PS plans next year, does it make sense to set up a Cross-Tested PS plan with a DB plan??? The combined plan 404 limit will still be the greater of 25% of comp or the 412 min req. contr in the DB plan. Any thoughts?? Thanks.

[AndyH]

dmb, I don't see how it is in the client's interest to set up a db and cross tested combination now in most cases. Depends upon the situation, but I doubt a 10% DB would be cost effective in most cases if tax savings is the motivation.

I think it makes less sense with the 25% 404 limit.

Tom, what part of my earlier comment do you disagree with, i.e. "somewhat true"?

[Tom Poje]

Andy - your statement that both plans must be included if one of them is cross tested - that is a true statement, depending on how you are using the term 'cross tested'.

Unfortunately, many people (and I would be included in the bunch) refer to any non safe harbor plan as cross tested. Technically, that is not true, since I could actually test a DC plan on an allocation basis under the general test. I wouldn't really be cross testing at that point.

I just wanted to make a clarification on the terminology used.

sort of like saying someone is 'excluded'. do you mean from the plan or from coverage. its not necessarily the same thing.

[AndyH]

Tom,

Ok, then I think we are in agreement. By cross tested, I meant testing a DB plan on a contributions basis, or a DC plan on a benefits basis.

I've found that a lot of plans assumed to be "cross tested" can pass on a much simpler contributions basis, so I try to use "cross tested" in a specific, literal, sense.

I was trying to say that testing a DC on a benefits basis, OR a DB on a contributions basis would cause both the DC and DB benefits or contributions to be aggregated in the a(4) test, but if neither were general tested this way, they do NOT need to be aggregated.

dmb, if you want to provide some specifics of the situation, I'll try to back up my comments about not adopting a 10% db. For example, how many people, what ages, what's the objective, the pay and age of the key people. Maybe some examples might be helpful.

[Guest sdolce]

Just to muddy things up a bit more from the design standpoint,starting next year you have to be alert to the recently finalized regulation on DB/DC combination plans,where the DC uses an allocation based on comparability.Broadly based allocation rates,gateway contributions,etc.UGH!

[AndyH]

sdolce, do you mean "soon to be" finalized regulations, or did I miss something?

P.S. Just saw the final regs. Thanks.

[Guest Doug Goelz]

Andy and Tom,

Am I understanding your comments correctly...are you saying that if I have a DC plan that satisfies 410(B) on its own and passes 401(a)(4) on its own via general testing on an equivalent benefits basis, I am forced to perform an aggregated 401(a)(4)test with a DB plan I may also have (a DB plan that also satisfies 410(B) on its own, and also satisfies 401(a)(4) on its own whether by a safe harbor or general tested design)?

To complete the 410(B) Average Benefit Percentage Test, you would need to test all plans on the same basis (on a benefits or contributions basis), but this does not require aggregate testing for 401(a)(4). At least I am not aware of such requirement for 401(a)(4).

Am I misunderstanding what you said? If not, can you give a specific cite in the regs that I can review.

[AndyH]

Doug, the answer to your question in the first paragraph is YES. They must both be included if one is general tested on a cross tested basis.

With regards to average benefits, yes both must be included. I'm not certain they both must be tested in the same manner, but as a practical matter that's the way a DB and cross tested DC would best work.

I'll be back with some cites.

[AndyH]

Doug, well, now I need to back off. I thought I was sure of my response, but in re-reading the regs, I'm not so sure.

[Guest Doug Goelz]

Andy,

I have read the 401(a)(4) and 410(B) regs many times. This doesn't mean I know it all, but it is my belief that there is no requirement to aggregate plans for 401(a)(4) under the conditions posted above. If you (or anyone else) find something to support your previous statements, please let us know.

Thanks,

Doug

[dmb]

Thanks for all the input. Now I am looking at a Cash Balance Plan to go with my cross tested PS plan. I have been reading where Cash Balance Plans can be set up as non-Safe Harbor plans as long as they pass non-discrimination testing. Does that mean I can have a Cross-Tested Cash Balance Plan???

[Tom Poje]

Doug-

sorry, I have been out for a few days.

I see I could have been a little clearer on my response as well. I was only referring to performing the average benefits test under 410(B). I agree there does not appear to be anything in the regs saying once you pass 410(B) and get to 401(a)(4) you can't cross test at that point

[AndyH]

Yes, I agree. Sorry, I got confused. A couple of days off has helped! My apologies to Richard Anderson as well. He was correct.

[nancy]

I hate to rehash this again, but I want to be sure I have it straight. If I have an employer that has a DB and a DC plan and they both cover all employees, pass coverage independent of each other then I have to aggregate for discrimination testing if I am testing the DC plan using a benefits approach? In addition, I would need to look at the gateway requirements for combo plans?

[Guest Doug Goelz]

Sorry Nancy, but you do not have it right. The short recap is that there is no special requirement to perform aggregate testing just because you are cross-testing a DC plan.

In your example, both plans individually pass 410(B). If your DB plan passes 401(a)(4) on its own (whether by a Safe Harbor design or a General-Tested design) you are done with testing the DB plan. The only thing you would need to do with the DB accruals is factor them into the Average Benefits Percentage Test (AB%T), if you need that test to show your DC plan rate groups are passing 410(B) on their own (i.e., one or more rate groups have a ratio of < 70%). If all your DC plan rate groups are passing 410(B) by having a ratio >= 70% (usually not the case), then you don't need to do the AB%T, and the DB accruals do not factor into the DC plan testing at all.

[nancy]

Thanks for your help.

[Dawn Hafner]

Can anyone direct me on how exactly to calculate the DB accruals to combine with the DC allocations for a combined ABP test?

ASAP if possible!

Thanks.

Dawn