Accrued to Date Method - Testing Service

[Guest Scott McHenry]

A DC Plan and Cash Balance Plan are aggregated for non discrimination testing. The Accrued to Date Method cross testing method is used.

Some participants have been full time since 1970s. DC Plan has been in existence since 1988. Cash Balance Plan is effective in 2002. The Cash Balance formula is based on compensation and does not reference service.

Assume an employee hired in 1980 and full time since then.

In calculating the DC accrual rate, I believe the following is permitted (no fresh start):

(1) DC Accrual Rate = PS account balance / avg. comp / 14 years testing service (years of DC Plan participation)

Agreed?

In calculating the DB accrual rates, I believe the following is clearly permitted:

(2) DB Accrual Rate = Increase in AB / avg. comp / 1 year testing service (only 1 year of participation)

Agreed?

Does anyone feel comfortable with either of the following:

(3) DB Accrual Rates = Increase in AB / avg. comp / 14 years testing service

or

(4) DB Accrual Rates = Increase in AB / avg. comp / 20 years testing service

Reg §§ 1.401(a)(4)-3(d)(1)(iv) and 1.401(a)(4)-11(d)(3)(i)(B) seem to allow DB Plans to base testing service on years prior to the effective date of the Plan. However, would this only be permitted if such years were considered in the benefit formula?

[AndyH]

I'll comment because nobody else has.

I think this is a gray area but here are the interpretations that I understand to be generally accepted:

DC plan testing service is years benefitting which could be years in which an allocation is received or interpreted as years since date of participation. I think you can argue either way.

In the case of a DB plan I think you're talking about either years benefitting for 410(B) or years considered in the benefit accrual, although I have seen years considered in the formula even if not part of an accrual fraction (linear reduction for years of service less than x but accrual on participation).

I think the testing service you are proposing to use is a stretch at best.