cash balance discrimination testing

[dmb]

I've done a few cash balance proposals, but it's been a little while and i'm still not totally fluent with regards to testing and such. I am working on a proposal for a two owner and 50 or so common law employees to possibly set up a Cash Balance with a PS plan. I have two groups, owners and others, would like opinions as to the best way to test for discrimination regarding the DC and Cash Balance contributions, whether cross testing is best or not. Thanks.

[Guest Scott McHenry]

What is the plan design goal? Have the budget for contributions or the contribution rates already been determined?

Has the PS Plan been in existence for a while? If yes, what has been the historical PS contribution rate?

What are the ages of the owners? Are there any other HCEs?

Assuming that the employees will be receiving a greater $ allocation in the PS Plan over the CB Plan and that the owners will be receiving significant $ in the CB Plan, my experience is that cross testing the plans together usually provides a better result than testing plan each separately because the difference in the interest rate and annuity purchase rate conversion factors for each plan (i.e. the cash balance allocation is converted to an accrual for testing using the crediting rate (we use 417e rates) whereas the profit sharing allocation is converted to an equivalent accrual using standard rates (7.50% to 8.50%). Because of this, there is more bang for the buck if the NHCEs receive $ in PS Plan instead of CB Plan.

For example:

Assume 40 year old, 62 NRA, 8.50% testing rate, 5% 417(e) Rate

1000 PS allocation * 1.085 ^ 22 / 111.9171 83IAM APR = 53.77

1000 CB allocation * 1.05 ^ 22 / 152.1572 94GAR APR = 19.23

[dmb]

Thanks for the response. There are only two HCEs and this would be the first year for the PS as well as the Cash Bal plan. So I can test the Cash Bal contributions using the 417(e) rates rather than the standard testing rates??? and you're saying that i would convert both contributions to an accrual rate and i would need to pass the rate group test and the avg. benefits test??

Thanks again.

[Guest Scott McHenry]

Yes, my understanding is that the determination of the accrual for the cash balance benefit is based upon the actuarial equivalence in the plan. If the interest crediting rate is the same as the 417(e) rate and the plan's actuarial equivalence definition is also the applicable 417(e) interest and mortality factors, then the accrual for testing would be calculalated using such interest rate and mortality factor.

Please note however that some of the effectiveness is lost when the most valuable accrual is calculated (applying the testing interest and mortality to the CB accrual). I would still say that it is more effective for testing purposes for $ to be allocated to the NHCE in the PS Plan instead of the CB Plan.

[dmb]

Thanks again, but it looks like i'm missing something. LIke i said, I have two onwers in their 50's who are the only HCEs and almost 60 other NHCEs from their early 20s to a couple in their mid 50s and if the allocation to the NHCEs is 3% of comp, it looks like the most i can give the owners is 26% of comp. Does that sound right??

[Blinky the 3-eyed Fish]

Are you testing the PS and CB plans together? Are the 26% and 3% allocations in the CB plan or both combined?

[dmb]

Actuallly, now I'm looking at a Cash Bal only.