DB/DC Combo Approach

[JAY21]

I'm just looking for an "Amen" or "no you idiot" comment(s) here, preferrably the former. Isn't one of the strategies with DB/DC combo tested plans (aggregated for both 410(b) and 401(a)(4)) not to offer a lump sum under the DB plan (or limit it to 5k only) so to keep MVARs for HCEs as low as possible and eliminate most/all of the 417(e) subsidy ? Has anyone had good experience with this. I guess I always wonder what happens down the road when the plan terminates and then they want the lump sum, would amending the plan to "then" offer lump sums work or does it "unravel" prior year testing that did not take 417(e) into account ? Thanks for any thoughts.

[AndyH]

I've done many of these and I don't think 417(e) is a major issue. I think it is more of a hassle than anything else. The effect of 417(e) is to inflate the MVARs of younger participants more then older participants, for whom the arrangement is usually established.

This all depends upon the demographics, of course, but I have found that the elevated DC contribution requirement caused by the gateway rules has a much more profound effect than the declining 417(e) rates. The EBARS for younger NHCEs should usually more than offset the impact of 417(e) on an older HCE's DB unit.

And regarding adding a lump sum provision, obviously you shouldn't do that after many NHCEs have quit and it is time for the HCE to collect, rather, if you want to do that I heard Larry Deutch suggest putting a provision in that allows for lump sums under, say, $25,000 only. Then lift the cap later. That way the amendment won't affect many if any NHCEs and also the testing can be done without the lump sum affecting the HCE's MVAR.

Just a few thoughts.

[JAY21]

Thanks Andy for the input. It was very helpful. I like the 25k L.S. idea too.