DC/DB floor offset combo

[Guest Dave Peckham]

Hello,

We are in the process of amending one of our DB plans to a floor offset plan to satisfy the “meaningful benefits” memorandum that Paul Shultz of the IRS came out with last year.

Prior to the amendment, the DB plan (#002) had very small but nonzero benefits solely to pass 401(a)(26). The 401(k) plan then had the 7.5% minimum gateway contributions needed to pass 401(a)(4). Obviously, we are general-testing both plans and don’t care about meeting any safe-harbor plan designs.

For 2003, we will have the plan sponsor adopt a new PS plan (#003) with a 7.5% anticipated contribution for all non-HCE’s. This will be identified as the DC offset plan.

Question #1: Can the 401(k) plan (#001) continue to permit the two HCE’s to get PS allocations in this plan, not plan #003, and therefore not have their plan #002 benefits offset by any projected account balance? The plan sponsor will probably have enough room to not violate the overall 25% deduction limit, even though the two HCE’s have 100% benefit formulas in plan #002. We would aggregate the 12/31/02 balances of plan #001 with the 1/1/03 DB accrued benefits for 401(a)(4) testing, then next year aggregate both the 401(k) plan #001 and the PS plan #003 balances at 12/31/03 with the 1/1/04 DB accrued benefits and test all 3 plans for 401(a)(4).

Question #2: For plan year 2003, I’d like to do a beginning of year 1/1/03 DB valuation. Can I project a DC plan #003 account balance at retirement for all the non-HCE participants, even though the first contribution won’t be made effective until 12/31/03? I realize that if a participant terminates without an actual vested DC account balance that there would be no offset, but I’m talking about projected benefits for funding purposes, not accrued benefits.

P.S. I'd like to ask Norm Levinrad for his opinion, but I can't find his email address on BenefitsLink. So, does anyone else care to answer?

[FAPInJax]

Well, I will take a shot at your questions.

The easy one is the second question. You can definitely project the DC plan (anticipating the contribution) enabling you to have a beginning of the year valuation.

The first question is a little tougher. I do not see why you could not allow the HCEs to continue to contribute to the 401k. This plan has separate testing. The part where the HCEs are not in the PS plan and therefore have no offset is the troubling part. I beleive you should be OK because of your general testing and not having reliance on the safe harbor rules.

Hope this helps!

[Guest merlin]

I have two email addresses for Norm Levinrad: normlev@ixnetcom.net and norman@summitbenefit.com. I think the first is more current.

[Blinky the 3-eyed Fish]

I am curious why there is the need for plan #003. It seems as if the goal is to keep the HCE's at the maximum DB benefit. Why not do 2 things: 1) increase the formula in the DB plan for the HCE's, so that the net benefit after the offset is still at the limit; and 2) only use the balance attributable to contributions after a certain date to offset the benefit.

Am I missing something? (It's been know to happen.)