DB/DC Gateway

[Blinky the 3-eyed Fish]

A DB and DC plan are aggregated for testing and coverage. The DB benefit is based on years of service and a high 3-year average. A person earns a year of service in 2004, enters the plan 1/1/2005 and then terminates 1/31/2005.

To determine her DB equivalent normal allocation rate for the gateway I am valuing the difference in the benefit earned during the year, so she had a $0 benefit at 1/1/2005 and a positive benefit at 12/31/2005. Of course I am valuing this benefit using the testing assumptions. For gateway, plan year compensation is used, so the result is that this person has an extremely high DB equivalent accrual rate, since she only had one month of compensation in the plan year.

So, I can certainly choose to average the DB equivalent normal benefits of the NHCE's who are benefiting and so this one little person is increasing the average by a lot. I have to believe I can count this person as benefiting even though they didn't meet the accrual requirements for the year because they did have an increase in the accrued benefit for the year. This goes to the position you can't have an accrued benefit prior to entering the plan.

Anyone see any flaws in this?

[AndyH]

An argument can be made that testing service should reflect accrual service, i.e. service not participation.

The other issue is interesting; your approach is a bit aggressive IMHO but perhaps arguable. One could also treat such person as a 0%. Isn't this the kind of short service issue that the IRS has been criticizing? What if the person only worked one day in the testing year, then you could hava a nearly infinite EBAR.

Consider an accrued to date DC plan test where somebody has a balance but does not benefit for 410(b) in a particular year. Even though the balance grew, he is still a 0%

[Blinky the 3-eyed Fish]

Well my measurement period is the current year, so the testing service has to be 1.

As for the short service issue, this person was hired in 2003 and full-time until her termination date. Plan entry requires a year of service. I am comfortable this falls far outside of the scope of those concerns.

I suppose my justification for this is that the DB plan is more generous in granting benefits on years of service and this just happens to be a beneficial result in the testing by doing so. It's not something I have had happen before, but from now on I am going to make all my DB plans within DB/DC combos based on service and tell clients to fire people in January. (Just kidding.)