"Gateway"

[Guest gkaley]

I have a question regarding the gateway test...first time using it this year...EBIA manual states, "the minimum allocation need not be provided to all NHCEs, just those eligible for the allocation under the plan." 1.401(a)(4)-8(B)(1)(iv)(A) is not clear to me.

Specifically, I have a plan that is looking to contribute a nonelective contribution on behalf of a group of employees that is losing a DB benefit. It will not pass on a contribution basis. Do only those NHCEs in this group need to have the "1/3 of highest HCE rate" allocation?

[Tom Poje]

in other words, if an ee is eligible for a nonelective contribution (including top heavy and SHNECs, he will receive something. since he received something, it must now be at least the lesser of 5% or 1/3.

your comment may further complicate things. You said some people are losing their DB beneift. if so,(e.g. the DB plan still exists) you also have the issue of combo DB/DC plan, in which the 5% might be kicked up to 7.5%

[Guest gkaley]

Thanks Tom, you've answered many of my questions over the course of the last 3 years, and I thank you for the quick responses.

As for the situation, everyone is actually losing the DB plan (terminated), but the new group of ee's is getting a YTD adjusted NAV type profit sharing to make-up for the lost DB plan.

Unrelated - yet related - question...are Cash Balance plans subject to a(4) testing????? A colleague says yes.

[Tom Poje]

as for cash balance plans...

not strong in this area, but I have from Notice 96-8:

Section 1.401(a)(4)-8© as issued 9/91 provides safe harbor method for cash balance plans. ...'a cash balance could be tested for nondiscrim as though it were a defined contribution plan with actual allocations = to the amount of the hypothetical allocations credited for the year. In order to use safe harbor, certain design requirements that relate to accrued benefit and valuation rules that are unique to DB plans must also be satisfied.

the revised regs in 9/93 did not change anything

The proposed regs that just came out (you should be able to easily obtain these and not fully understand them) look like they require you to use the gateway required for DC/DB combos.

In other words, it looks like you will have to satisfy 1/3 or 7.5% contribution. Of course, as proposed regs, these are not in effect until the final regs are issued, but....

so, before you can test under general nondiscrim, you have to meet the gateway, and it looks like it is going to be the db/dc gateway, at least in the future

[Guest gkaley]

ok...i finally broke down and read a(4)-8 and it does look like cash balance plans fall into this, especially if tested on a contribution basis.

When you say "7.5%" where is this coming from? I see the 1/3 requirement and the 5% minimum safe harbor. I don't see a 7.5% allocation requirement...i must be missing something?

[Tom Poje]

it just came out in the proposed regs from, what was it, a couple of weeks ago.

I liken it to the following:(ignoring the 1/3 rule)

The gateway works somewhat like the top heavy minimum rules

since the dc plan is tested on a benefits basis provide the top-heavy minimum for db/dc plans, which is 5%.

cash balance plans would be like a top-heavy plan that is using the buy-back, so it increases to 7.5%.

Maybe that is a goofy way to remember it, but my mind is already over cluttered