DB/DC combo testing issue-avoiding the Gateway

[AndyH]

Controlled group of many companies, one of which has a DB that must be general tested. Other related companies have DC plans with nonelective contributions.

The DB plan does not pass coverage (or more to the point the NCT part of the general test), so it is aggregated with one of the DC plans that has nonelective contributions of about 3%.

The DB plan has HCEs that accrue more than 35% of pay, which means that the DB/DC gateway would be 7.50%.

Assume that 100 NHCEs benefit in the the DB plan but that plan needs 125 more NHCEs to pass the NCT part of the general test (and 410(b) as well). One option would be to aggregate a DC plan with a nonelective contribution and make sure that all NHCEs get or average an accrual of 7.50%. That would be very expensive.

Question: Instead of providing all NHCEs with the 7.50% gateway, could I do an 11-(g) amendment and provide 26 NHCEs in one of the other companies with a DB accrual for the year? This would make the DB/DC combo have 126 NHCEs with DB benefits and 125 with DC accruals, making the combo primarily DB in nature which avoids the gateway.

Is there anything prohibiting this?

[Tom Poje]

what would happen if you tested on an allocation basis? 1.401(a)(4)-8©.

I've wondered about this - there is no 'minimum gateway', those rules are in -8(b) for when you convert a contribution to a benefit, but I don't see a corresponding rule - maybe it is because nobody will be in the HCE rate group, but then it would seem you could do an -11(g) to put some people in the rate group.

oh, just ignore me and my twisted ideas. it was only a thought.

[AndyH]

Now, that is out of the box thinking. Might work in some situations. I'll mull that over, thanks. I must be twisted as well, as I kind of wondered about that also but wasn't sure that it avoided the gateway. But it looks like you are right.

[AndyH]

Do others read it the same way? Testing a DB/DC combo on a contributions basis avoids the gateway? Obviously this does not usually work, but outside the context of a closely held business it might, or at least the 11-(g) fix might be cheaper.

[Tom Poje]

for those interested see:

1.401(a)(4)-9 is the regs on DB/DC testing

in particular -9(b)(2)(ii) speaks of testing the DB as an allocation rate. there is no special requirement for a gateway under this section

-9(b)(2)(v) speaks of 'eligibility for teating on a benefits basis, which says you can't test this way unless you meet the aggregate gateway.