Is this possible?

[Guest smhjr]

I recently had a CPA send me a DB/DC proposal provided to one of his clients by a TPA firm. He is an aquaintance and knows that I work as a TPA (i only deal with DC plans but he doesnt know that) and he wanted me to take a look at the design and let him know if it is legitimate.

I don't have all of the facts, because the proposal information I received seemed incomplete, but the facts that I can see are:

41 eligible employees

6 of the eligible are owners of the company

3 of the employees are also highly compensated

32 remaining eligible employees are NHCE.

The DB plan covered only the 6 owners at 50% of their AMC. Retirement date of 65 with a 25 year benefit accrual.

The DC plan covered all the other employees. I can't recall the contribution percentage, but it was a flat % in somewhere between 5 and 10 percent of pay. There was no overlapping coverage between the plans.

They did not include any discrimination testing with the proposal. When I asked the CPA friend to obtain the testing, I received a 410(b) and 401(a)(4) testing that showed that the DC plan passed everything and that the DB plan passed nothing. They included one sentence in the email saying that the plans would be combined for non-discrim testing at a later date.

My questions are these (please keep in mind, I have limited working DB knowledge):

1) Doesn't the DB plan have to pass 401(a)(26) so that the DB plan has to cover at least 41*.4 = 17 employees?

2) Can the plans be combined for non-discrimination testing or must each plan pass on its own?

3) The TPA firm uses Datair (which i am not familiar with) and it has 6 different tests. Annual with and w/o permitted disparity, accrued-to-date with and without permitted disparity, and equivalent allocation with and without permitted disparity. Which of these tests must it pass? Any of them, all of them? a specific one?

4) Any other input or something I am missing? I figure I am likely missing something.

[JAY21]

1. I agree, how are they passing 401(a)(26) with only 6 in the plan ? This test can't be aggregated with the DC plan so that's a big issue. 2. Yes, you can combine the discrimination testing if the DB plan somehow passes 401(a)(26). 3. You can use either the annual method, accrued-to-date, and projected method, whichever you prefer. The equivalent allocation methods sounds like "cross-testing" to me (maybe the DC contributions), but I don't use Datair to run discrimination testing so I'm not sure of their "vernacular" language they use to describe their test . 4. I'd focus on the 401(a)(26) issue first and then if you're convinced it passes, focus on proof the discrimination testing passes the 1st year as it either has to pass on a stand-alone or combined basis the 1st year, you can't just defer it to a later year. It wouldn't seem it would pass discrimination testing on a stand alone basis.

[david rigby]

Good comments. Another point to watch out for: if someone claims the plan passes (a)(26) due to "separate line of business", the only answer is

"According to IRC 414®(2)(A), a SLOB must have at least 50 employees."

[AndyH]

Agreed, excellent questions and excellent answers. Very astute for a non DB person!

Pax, thank you for that comment. You have no idea how timely and pertinent that comment is.

Blinky, feel free to pass on my story to Pax if you wish. Amazing. I'll explain it to the people who sent me PMs on a related matter.

[Belgarath]

Pax - are you sure the 50 person requirement applies to a DB plan for 401(a)(26) purposes? I believe 401(a)(26)(G) gives you a pass on the 50 person requirement of 414® that would otherwise apply. But, I'm speaking from a theoretical basis rather than practical, as we don't handle QSLOB plans, so there may well be other guidance, or my interpretation may be way off. What do you think?

[Guest arttepfer]

Are you sure of your facts? There is an exception if the DB plan is part of a floor offset arrangement. It seems unlikely that anyone would try to design a DB plan with only 6 employees in a group this size. Again, depending upon eligibillity ie 21/1 maybe the plan would work but only in the first year. Too many unknowns to make a definitive comment.

[Guest smhjr]

Someone else I talked to mentioned this floor offset. How could it apply to this situation? It is my understanding that the floor offset is put in place to pay benefits in the case where the DC plan will not pay a minimum lump sum whether by assumptions or actual circumstances. Basically if the annual 5% of pay contribution compounded at 8% anually does not reach a minimum balance that the DB plan would provide as a lump sum then there is additional funding for that participant in the DB plan. It would also affect a person that loses large amounts of money in the DC plan or where the annual % gain does not reflect the assumptions.

If I am mistaken on this please try to clarify it for me.

My problem with the example in my original post is that the 6 owners are not receiving a profit sharing contribution at all. We aren't in a situation where the DC may or may not provide the floor benefit because they aren't receiving a benefit in the DC plan. I should complicate this a bit by saying that there is a current profit sharing plan in place in which all of the owners have a balance. It is my assumption that moving forward the TPA was implying the owners would no longer benefit in the DC plan.

In a floor offset I would think that the existing balances in the DC plan would have to be calculated, correct?

So if the TPA is proposing a floor offset of some kind then the 401(a)(26) test would pass because all of the participants are benefiting in the DB plan? It just may be that none of the non-owners are receving a contribution during this particular time because the DC contributions/balances are sufficient?

[Blinky the 3-eyed Fish]

To your last 2 questions: maybe and maybe. Why not talk to whomever proposed this and see what's going on as all the facts apparently are not to light?

[Guest smhjr]

Oh Blinky thats no fun, you ruin all the fun of figuring it out that way! I already told the guy the point about the 401(a)(26) and let hm know that I wasn't really the one to talk to about this with my limited DB knowledge. He will probably go ask the questions and I will be out of the loop.

But I am the type of guy that gets all caught up in the thinking part of these things. Now that my nose got into the project I want to figure it all out. Besides I am not really in a position to contact the other TPA, heck I don't even know who it is. I probably won't ever hear of the conclusion to it unless I call the guy who asked me to look at it and specifically ask.

Inquiring minds want to know, or something like that.

[AndyH]

Belgarath and/or Pax, do you both agree that the 50 person limit does not apply for 401(a)(26)?. I think I read somewhere that EGTRRA changed this. Right?

[Belgarath]

Well, I think it doesn't apply, as per my earlier post. But I don't believe this was an EGTRRA change.