Cross testing

[Guest blackdo2]

Reg 1.401(a)(4)-9(b)(2)(v)(D)(2) provides that when testing an employer with both a defined benefit and defined contribution plan, the minimum aggregate allocation gateway is deemed satisfied if each NHCE in the DC plan receives a minimum allocation of 7.5%. Has anyone tested successfully where the minimum allocation was not used and what were the testing results? Any pitfalls to look out for?

[Blinky the 3-eyed Fish]

I am not sure I understand your question. You must give the minimum gateway to even begin to test for nondiscrimination, so when you ask if anyone has tested where the minimum was not given doesn't jive.

[Tom Poje]

Blinky:

maybe the gateway is not being satisfied with the gateway minimum of 7.5%, but rather the plans are 'primarily DB in character' or they are Boradly Available Separate plans.

I've only run one DB/DC combo and that provided the 7.5%, so I have no experience with the other scenarios. It is so ingrained in my mind to provide the minimum allocation that I rarely think about the possibility of broadly available rates even when proposing just a DC only plan. An age weighted plan with at least 17 years difference actually works better. (1.085 ^ 17 = 4.00, thus a 5% contribution to an NHCE can allocate 4.00 * 5% to the HCE at $200,000 who is 17 years older.)

[AndyH]

If that is the question, then I have tested for several years a DB/DC combo that needed a 5.5%-6% DC contribution to pass. Once the gateway rule came into effect, the gateway was around 7% (you can use the pv of the average NHCE db accrual toward the gateway), and of course it passes much easier.

This obviously depends entirely on the design and demographics.

[Guest blackdo2]

Thank you for your input. I had an attorney call and indicate that he had a law firm client that has a DC plan for the non-attorneys and wants to put in place a Db plan for the attorneys and was wondering if anyone has tested by not putting in 7.5% to the DC plan. Sounds like some of you have.

[Blinky the 3-eyed Fish]

Tom, while you are correct the those types of plans will preclude the need to meet gateway requirements, most of these types of plan designs do not meet those criteria.

Andy, I have many DB/DC plans tested together and have found that none of them are able to provide any less than 7.5%. I am curious as to your situation where 7% could pass. Care to share some details of the plan designs?

[AndyH]

DB plan provides annual accrual of 7% to owner and .5% to all other NHCEs. Some HCEs are excluded. DC plan provides 7% to all NHCEs and most but not all HCEs. The pv of the DB accrual for NHCEs averages somewhere between .5% and 1% on an contributions basis. That is subtracted from the 7.50% requirement.

Part of aggregated plan (old HCEs included) tested on benefits basis and part (young HCEs included) on a contributions basis.

Plan was designed by a very well known person at the forefront of this technique.

[Blinky the 3-eyed Fish]

Ah, so they are getting the equivalent of 7.5%, just some in the DC and some in the DB. That is more typical of what I have seen.

We have many plans similar to this. Ever considered offsetting the DB benefits by the DC accruals and just providing 7.5% in the DC plan? It alleviates those little DB benefits everyone will have.

[AndyH]

Not a bad idea, but it's hard to take away something now even if it is little.

I'd guess there may have been a concern about 401(a)(26) at the time, but as I understand it that is no longer an issue.