Is This a Loophole ? Or , What Am I Missing ?

[LIBOR]

Recently took over the admin for a DB plan ; the sister PS plan is administered elsewhere - there are 10 benefiting HCE's , 6 benefiting NHCE's , & 24 excluded by virtue of job description - the entire group of 24 is covered under the PS plan - there are no statutorially excludables ; the benefit formula is safe harbor .

Participation is passed ( i.e. 401(a)(26) ) since 40% of 40 is 16.

Coverage (410(b) ) is satisfied under ratio percentage by aggregating the plans and treating them as one.

Question: In order to aggregate plans I thought comparability of the plans had to be demonstrated using something like the principles under Rev. Rul. 81-202 , for example. However, regulation 1.410(b)-7(d)(1) doesn't seem to require comparability ??

[Blinky the 3-eyed Fish]

The two plans are being aggregated for coverage so you need to aggregate them for nondiscrimination. The combined plans are certainly not a safe harbor and must be general tested as you have 24 people in the DC getting nothing in the DB. Additionally, the gateway rules will apply unless you can general test on a contributions basis.

[david rigby]

LIBOR,

Another way of saying Blinky's comment is that aggregating for 410(b) is related to coverage only, not the level of benefits, which is tested under the 401(a)(4) rules.

[ubermax]

Thanks Pax and Blinky !!

In my example I mentioned that Coverage was satisfied by aggregating plans and using the Ratio Percentage Test - and this seems OK from looking at the 410(b) regs - but it almost seems like that's too easy - the Profit Sharing plan could be a very minimal plan.

It almost seems like the Average Benefits Test would be required ??

[Tom Poje]

there are a number of possible problems with that scenario.

1. if one person quits from the db plan you fail min participation.

2. db = 16 ees and DC= 24 so the combined 'plan' is not primarily DB in character. that means, if cross testing comes into play the minimum allocation gateway would have to be provided. Unless you test on an allocation basis, but if you are only providing a minimal dc benefit that looks pretty grim.

3. ignoring the minimal allocation gateway lets look at an example.

suppose the DB provided 3% accrual/year. rather simple, E-BAR=3%

suppose the DC plan provides only 2% of comp. For a 51 year old at 8.5% interest rate assumption this means (I'll use comp = $20,000, but comp is pretty much irrelevant)

contrib = 2% * 20,000 = 400

at NRA 65, ee has 14 years to retire

so 400 * 1.085 ^ 14 = 1253.36 this is how much that contribution would grow to at age 65. (Lump sum)

If you were to buy a life annuity (APR for 1983 IAF, 8.5% at age 65 = 115.39)

so dividing this lump sum by the APR and multiplying by 12 (to produce an annual benefit) you have

1253.36 / 115.39 * 12 = 130.34

if you divide the annual benefit by comp you have the E-Bar

130.34 / 20000 = .65

this is way less than the DB benefit, so this person is not in the rate group of the HCE. not even close.

without checking the numbers, I believe you wouldn't have anyone in the rate group until you get down to age 31 or so. you have 30 NHCEs out of 40, or 75% this means you have a midpoint of 33.75. thus, to pass nondiscrim classification you need 33.75% * 30 NHCE = 11. you have 6 from the DB so only need 5 from the DC. That looks promising, but you would also have to pass avg benefit % test. If you have a 401k, that looks promising, but if not you may have problems. and again, this doesn't adress the issue of providing the minimum allocation gateway.

As an aside

if you are wondering why I chose the numbers I did, I happen to be working on an illustration for an ASPPA talk, and I happen to have the numbers handy. the .65 is the magic 'extra' amount that can be tacked on if you impute disparity. Thus, if you provide a 3% SHNEC and a 2% profit sharing you meet the minimum allocation gateway at 5%. You are not allowed to impute disparity of the safe harbor portion, so this was merely an illustration to show approximately at what age imputing disparity kicks into full effect in a safe harbor 401k plan.

[Blinky the 3-eyed Fish]

LIBOR = litespeed?

Anyway, I hope Tom's post may have cleared some things up because your last post shows a little uncertainty. For coverage this could be very easy to pass since you are aggregating the plans. You could give $1 to everyone in the PS plan and a huge benefit to everyone in the DB plan and this would pass coverage testing at 100% as everyone would benefit. But as pax said, you now have nondiscrimination concerns under 401(a)(4) because the level of benefits does not meet any safe harbor. That is why you certainly cannot have a "very minimal" profit sharing plan as Tom explains.

General testing a DB plan and a DC plan is an advanced concept that requires a thorough knowledge of general testing as it specifically relates to DB plans. Having the plans administered by two separate parties adds to the difficulty. Good luck.

[ubermax]

Thanks all !!! and yes , Blinky litespeed=LIBOR -----home & work pseudos ----

I do a lot of road biking and I ride a Litespeed , made in Tennesee -- very light ---and the London Interbank Rate ( LIBOR) sounded good at the time !!!