Cross Tested DB

[goldtpa]

Doing some wotk for a new DB plan. Plan is cross tested.

Normal Retirement Benefit is % of Avg Mo Comp multiplied by Yrs of Serv limited to a max of 10 yrs.

The problem we are having is that each employee has a stated %.

NCHE1 gets 0% of Avg Mo Comp

NHCE2 gets 2% of Avg Mo Comp

NHCE3 gets 6% of Avg Mo Comp

HCE1 gets 6% of Avg Mo Comp

HCE 2&3 get 0% of Avg Mo Comp

Can you state a different percentage for each ee?

We usually do it by classification (i.e all owners get x% all NCHEs get y%)

[SoCalActuary]

You can indeed state a different benefit by employee, whether it be a DC plan, DB plan or cash-balance DB plan.

You just have to deal with the consequences, namely -

this is not a safe-harbor design, so you must pass 401(a)(4) by the general test.

You are testing coverage by name, although I wonder if this is good drafting, since the plan may be top-heavy

and you appear to include participants but with zero benefit formula. Better to have them excluded

by name and tested with a zero benefit amount.

[goldtpa]

The plan was cross tested, passed the gateway test, 410(b), and yes the plan is Top Heavy.

We were going to amend the plan and submit to the IRS for a LOD. Just wanted to make sure that we would get one since our doc system did not allow for this.

thanks for the reply.

[JAY21]

I think if you're passing each rate group under the general test at 70% or more, without relying upon the Average Benefits Test, then you don't have the reasonable classification of employees issue in the plan doc and you should be ok. If you are using the Avg. Benefits Test, then I'm not as confident of your odds of success, though you mightly certainly still try it and see.

[Effen]

What exactly do you mean by a cross tested db plan? Are you converting the benefits to allocations and testing on a DC basis? If so, what advantage does that have?

[AndyH]

Effen wins the prize. This plan is either not cross tested or it was designed for one NHCE primarily.

The plan would by design pass the general test on a benefits basis considering only Normal Accrual Rates but if (as most think you must) you are including a lump sum provision in the MVAR then you may not pass the a(4) test unless NHCE3 is close to in age or older than HCE3 which would make the design make sense only in peculiar circumstances.

[SoCalActuary]

goldtpa: the plan is under the general test for 401a4. If the db is tested as a dc, then it used the cross-testing method of passing 401a4. If it was tested as a db accrual, then it is not cross-tested.

Re: top heavy. If the employees with zero benefit are excluded, then they have no th benefit because they

are not eligible for the plan. If they are not excluded, but the benefit formula is zero, then they end up

getting the th benefit. So, are NHCE1 and HCE2 & 3 participants or excluded?

[Penman2006]

There have been a number of discussions on naming names in the plan document on this message board. I have not reviewed them or the regs before writing this but I believe that while naming names is acceptable it forces the plan to pass 410(b) coverage based on the 70% ratio percentage test because the average benefits test is a two part test, one part is the numerical average benefits test and the other part is the nondiscrimatory classification test. Naming names fails the nondiscriminatory classification test.

However, with respect to rate group testing under 401(a)(4) for this plan that names names, if the plan passes the average benefits part of the average benefits test, then the rate group testing can indeed use the mid-point between the safe harbor and non-safe harbor range based on the NHCE Concentration % to pass, rather than needing 70% to pass.

[AndyH]

No. That is not correct.

http://benefitslink.com/boards/index.php?showtopic=32749

[Penman2006]

I think it is pretty much correct. If a plan names names as an eligibilty requirement, then it must pass the ratio % test because naming names is not considered a nondiscriminatory classification, therefore the two-part ABT cannot be passed. If the plan also names names for benefit level purposes, then the plan can use the mid-point to pass 401(a)(4) as long as the ABT part of the two-part ABT passes (regardless of the nondisciminatory classification test).

[AndyH]

If a plan names names as an eligibilty requirement

If this is happening, then, yes, I agree with you. But I didn't think that was being proposed.

Sorry, from your clarification, you are not incorrect, you are simply commenting upon a different fact pattern than I am.

[Penman2006]

No problem, I was not clear.

[SteveH]

Someone above mentioned "cross tested DB plan" and a couple people (sorry forgot the names) took exception to the term. In my brain I use the phrases "new comparability" and "cross tested" interchangeably. Mainly because I hate calling a plan "new comparability" when we have been doing it for like 10 years. The newness has worn off, at least it has for me.

Now also when I think of a new comparability profit sharing plan, I think of a profit sharing plan with different allocation percentages to different groups.

If you apply the different allocation formula to a DB plan as being a "new comparability" DB plan and that is interchangeable with "cross tested"... well you get the point. At least this is what I think the original person was referring to. He was calling his DB plan with seperate formulas a "cross tested DB plan" and that probably wasn't literally what he meant.

So what do you call a DB plan with different formulas for different classes of people? Just a DB plan?

[Mike Preston]

What it is. A DB plan with multiple formulas, which may or may not pass a4 as a safe-harbor design. Note that I think, if I understand the design properly, that this plan is a safe-harbor as it qualifies as a 2% plan that covers 2 NHCE and 1 HCE and an additional 4% plan that covers 1 NHCE and 1 HCE.

Isn't it a safe-harbor multiple formula plan?