DB/DC Gateway question

[AndyH]

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?

[Mike Preston]

The simple answer is that only those who otherwise are considered as benefitting under 410(B) need be considered in determining whether the plan satisfies the gateway percentage of 1.401(a)(4)-9(B)(2)(v)(D).

But, keep in mind the following:

1) 7.5% is the required "total" of the allocation rates between the DB and the DC plan, not the amount that must be provided solely from the DC plan.

2) If an NHCE is benefitting not only under the DC plan, but also under the DB plan, the plan sponsor can optionally use the average of the NHCEs' DB allocation rates for all NHCEs who participate under the DB plan.

[Guest Doug Goelz]

1.401(a)(4)-9(B)(2)(v)(D) states that each NHCE in the DB/DC plan must satisfy the minimum aggregate allocation gateway

The preamble to the final regulations state under paragraph B that an NHCE is an employee as defined in 1.401(a)(4)-12 who benefits as an employee under the plan for the plan year and is not an HCE..."Thus, an individual who does not otherwise benefit under the plan for the plan year is not an employee under these regulations, hence not an NHCE, and need not be given the minimum required allocation under the gateway."

Granted the above is under the section of the preamble pertaining to the gateway for DC-only plans, but it does not state anything to the contrary for DB/DC plans. My take on that then, is that the same approach applies for DB/DC plans.

Therefore, I believe that if you are providing the 7.5% gateway to each NHCE who benefits under the DB/DC plan (either receiving an allocation under the DC part of the combined plan, or an accrual under the DB part of the combined plan), then you are satisfying the regulations on the gateway. If you have other NHCEs who are not benefiting under either part of the DB/DC plan, you don't have to give them the 7.5%. This wouldn't change even if they were benefiting under another plan that was not being combined with the DB/DC plan being tested.

[AndyH]

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?

[Mike Preston]

Averaging the rates might help. It might also hurt. Or, better I should say, if it hurts, you just don't do it that way.

The gateway is defined in terms of the "allocation" rate. If the DB plans provides for an annuity of 1% of pay per year of service, payable at NRA, you convert that to an equivalent "allocation" in order to test the gateway. You would definitely NOT just use the "accrual rate" of 1% of pay! Think of it as the reverse of what we normally do under cross-testing. But it is still cross-testing.

[Guest Keith N]

I'm just re-examining these rules again.....

I was under the impression that if I gave a 5% DC allocation and 2.5% cash balance allocation, then I have met my 7.5% gateway. Now that I read the Regs. again, I'm not so sure.

Lets say I have a cash balance plan and a profit sharing plan that I am aggregating for (a)(4) testing. The cash balance plan that uses the 417(e) rates to convert the cash balance account to a monthly benefit at retirement. Since this is part of my plan’s benefit formula, I take the amount allocated in the cash balance, accumulate it at 5.5% (assumed GATT Rate) to Retirement Age and divide it by my annuity factor.

For example: 20,000 comp, age 35, RA 65, 2.5% Cash Balance

20000 * .025 * 1.055 ^30 / 11.07 = 225. This is my db Accrual Rate, which I would add to my Equivalent dc Accrual Rate for a(4) testing.

As I now read -9(B)(2)(D)(2), it clearly states that the "aggregate normal allocation rate" must be at least 7.5%. Does this mean that I have to re-convert my $225 db Accrual to a dc allocation rate using "Standard Interest Rate" and "Standard Mortality Table"?

For example: 225 * 8.38 * 1.085 ^-30 = 165 (83 GAM-male 8.5%)

Therefore my 2.5% cash balance allocation only counts at .825% (165 / 20000) for the gateway? This seems very illogical since the solution would be to shift it all to the dc plan, which would actually help me under (a)(4).

Am I missing something?

[Mike Preston]

I haven't checked the math, but the theory is correct. You can't add 5% and 2.5% to come up with 7.5% when the 2.5% is a cash balance allocation. Gotta convert the 2.5% to a benefit and re-convert it back to an allocation percent.