401(a)(4) Testing of Contributory DB Plan

[Guest Doug Goelz]

A DB plan requires participants to contribute 2% of pay, in order to receive a benefit of 1.2% of Final Avg Pay x Service. If the participant does not contribute, he only recieves a benefit based on the formula $10 x Service (max 10 years considered). The plan covers all employees of the employer; however, only 56% of the participants have elected to make contributions. All the HCEs have elected to contribute.

I am not sure at this time if the plan would pass 401(a)(4) testing if all employer-provided benefits were tested together. It had been my belief that a plan having multiple formulas such as this would need to be restructured and tested as separate plans. However, the contributing formula can not pass 410(B) on its own (fails ratio test, since <70%; and fails Avg Benfs Test, since their is no classification that can be used to satisfy the reasonable test of the Nondiscriminatory Classification Test).

I have heard several people say that since the more generous benefit formula is available to all employees at their election to make the contributions, there are no coverage issues. I am having a hard time accepting this, and I would appreciate hearing how others would tackle the 401(B) and 401(a)(4) testing issues for this type of plan.