DB participation

[Guest lerieleech]

Another question:

Suppose a company maintains a DB and a DC plan. We are cross-testing the two plans in order to pass nondiscrimination. Basically, all the NHCEs participate in the DC plan and receive a 7.5% gateway contribution.

The two owners participate in the DB. Enough NHCEs will participate and receive meaningful DB benefits to qualify under 401(a)(26).

The question is: Under this scenario, is it permissible to determine who participates in the DB plan according to a cutoff date for hire? In other words, for example, could we say that anyone who was hired before 1/1/95 is a DB participant and anyone who was hired afterward is not?

[Blinky the 3-eyed Fish]

You can set the eligibility in the manner you suggest. You could set it to be people taller than 6 feet are in the DB plan or some other such nonsense. The issue is with a random eligibility rule is that it doesn't satisfy an objective business criteria. However, this is only an issue if you are needing to pass coverage passing the average benefits test. That apparently is not the case here since you are aggregating the plans for coverage and everyone is included in one of the plans.

[Guest lerieleech]

Blinky,

Thanks.

I have to say that I too thought it was allowable. But now (and not because of anything you said), I don't believe it is.

After reviewing the Code, I think what I proposed is a violation of Section 410(a). Setting a cutoff date for hire is directly related to setting a service criterion, which 410(a) says you can't do.

[jpod]

I think you were correct the first time. Using a cutoff hire date is not a violation of 410(a).

[Effen]

Especially now there are lots of closed db plans out there. Plans freeze participation as a transition away from the db plans all the time. I agree with ipod & Binkly. It is ok to limit participation to people hired prior to a certain date, assuming you can pass all the applicable tests.

[Guest lerieleech]

The problem I have with it is, even if we can pass 410(b) without the average benefits percentage test, and 401(a)(4) allows us to pass the classification test automatically if the rate group test passes, it still appears to be a violation of 410(a).

Actually, it's the regs--- Section 1.401(a)3(e), which says that a provision which has the effect of imposing an age or service limit are treated as if they impose an age or service limit. That's what I can't get around.

Maybe the whole thing doesn't make much sense when you put everything together, but that's what it appears to say.

We have decided not to use the cutoff date for date of hire to determine DB participation.

Thank you all.

[AndyH]

leerie, if you let some of these people in after 3 YOS or more then you have a 410(a) issue. Say instead you had a pattern of suspending participation then periodically declaring "open enrollment" you also might have a 410(a) issue. But you are not descibing either of these situations. A permanent closure is not an extended service requirement.

[Blinky the 3-eyed Fish]

1.410(a)-3(e)(1) example 6 would require the plan to first have proper eligibility requirements and then freeze participation to be acceptable. So starting a plan with eligibility that just includes those hired before a certain date isn't acceptable. I didn't consider that in my first answer. BUT the point you are not considering lerieleech is that you are testing the two plans together for coverage. Thus your eligibility is fine because of the DC eligibility.

Anyway if you are so worried, get creative. You could just name the people who are eligibile for the DB plan rather than stating just those hired before 1/1/95.

[Guest lerieleech]

Blinky,

We may do that.

And you're right; I hadn't thought about the notion of testing the two plans together resulting in including the DC requirements for eligibility.

I realize that naming names would be OK under the regs, even if you are naming people that happen to be the only ones hired before a certain date.

It makes no sense when you put it all together, but I would rather avoid drafting the plan with wording that *might appear to* violate 410(a), even if we can accomplish the exact same thing another way.

Actually, I'm not sure we'll name the ones who have been there the longest. It just so happened that the people the client had picked to be in the DB plan so far were the longest-tenured employees, and it dawned on me that maybe we could classify the eligible participants this way. So, when we decide who the other participants will be, we may not go by the cutoff date for hire.

Again, thanks to all.

[Guest lerieleech]

leerie, if you let some of these people in after 3 YOS or more then you have a 410(a) issue. Say instead you had a pattern of suspending participation then periodically declaring "open enrollment" you also might have a 410(a) issue. But you are not descibing either of these situations. A permanent closure is not an extended service requirement.

Andy (and Effen),

I will take that under consideration as well.

Thanks.

[SteveH]

Blinky:

Shouldn't you use some sort of job classification for eligibility? I have been working under an assumption that it was ok to name names for allocation/accrual amounts, but not for actual eligibility. I don't know what section it is, but eligiblity must be determined in a non-discriminatory manner. I would think naming names could be considered discriminatory.

In other words lets say we have Judy the administrative assistant.

It would be ok to say:

Administrative Assistants are ineligible to participate in the plan. --- Or if everyone was eligible for the plan it would be ok to set the allocation formula for administrative assistants at zero.

It is not ok to say:

Judy is ineligible for the plan.

Right?

I know you kind of get to the same spot, but if she is a participant you have top heavy and gateway considerations. Those contributions are probably taken care of in the DC plan in the example in this thread. I just think you MIGHT have a problem if you are naming names in the eligibility section of the document.

[Blinky the 3-eyed Fish]

No, naming names for eligibility is fine as long as you pass 410(b) on the ratio percentage test. If you have to pass average benefits for coverage, then you have to meet part 1 of that test - the reasonable classification test. Naming names does not meet the requirement of a reasonable classification. Note thought that the ratio test has no such requirement and that's why it's ok if you pass ratio %.

[SteveH]

Ok, I'll buy that. Would that be on a stand alone basis for the DB plan or combined with the DC plan? Obviously if everyone is covered by at least one of the plans you are passing the ratio test if you combine for testing.

It seems odd to me that you would be picking 40% of the employees to be covered in the DB plan and then allow everyone else to benefit in the DC plan. Then say we pass a ratio test and everything is fine. When i say strange, just strange to me because I haven't been designing plans like that. Now that might not pass gateway, but thats a different topic.

[SoCalActuary]

Blinky was giving 401(a)(26) its proper respect, while keeping the DB coverage as low as possible.

[SteveH]

Yeah, I am familiar with 401(a)(26) , but in practice how is this done? Is this an addendum at the back of the plan document each year? Are you amending the plan to put everyone's actual name in the eligiblity section? That would probably require an amendment each year.

I think I would actually laugh out loud if a takeover document came across my desk that read,"Susie, Jimmy, Patty, Tom, Blinky, SoCal, PIP, Andy, and Ed are eligible for the plan, everyone else is out."

So it sounds like naming names for eligiblity is ok, as long as the DB and DC plans are tested together so that as long as we have 70% overall participation in the plans we pass the ratio test.

1 eligible HCE

9 eligible NHCE

4 covered by the DB plan includes the HCE, these 4 do not receive DC allocations.

4 differnet people covered in the DC plan and are not covered in the DB plan.

Test the plans togehter.

That is a 77.8% ratio test.

A 40% DB participation test

If everyone receives the same accrual benefit in the DB plan and the same allocation rate in the DC plan then we don't have to general test and all is good?

[AndyH]

Yes, and the addendum typically includes pictures, like your college reunion invite, and avatars like Blinky's and Tom's so there is no ambiguity about who is eligible. Sometimes they have hyperlinks to personal sites at myspace.com.

[SoCalActuary]

For such a plan, I would even consider adding ttott to the eligiblity list. But I want to be in the db portion please.

Seriously, your scenario seems likely to pass the general test as well, provided the ABPT works.

In addition, please note that naming in the eligible participants is considered safer practice than naming out the ineligibles. Then if you test and find you need more people, you add what you need.

The name-out alternative is much riskier, because your expensive benefit formula could add someone you did not intend to cover, but failed to exclude on a timely amendment.

[figure 8]

So starting a plan with eligibility that just includes those hired before a certain date isn't acceptable.

I know this thread is almost 10 years old, but I wanted to check in on the issue of starting up a new DB plan where no one hired after "x date" is eligible to participate.

Soft freezes are common, as it's okay to change the eligibility of a plan to say that "no one shall enter the plan after the soft freeze date." While a soft freeze might not necessarily state anything about date of hire directly, it is, in essence, saying that nobody hired after a certain date will be entering the plan.

So what difference does it make if the plan is a new plan or a pre-existing plan when you say no one hired after "x date" will enter? I'm having a hard time wrapping my head around why a soft freeze is okay, whereas starting a new plan saying no one hired after x date shall be eligible to enter is not okay. Furthermore, I would think that classifying a group of employees as two groups - everyone hired before x date and everyone hired after x date - would be a reasonable classification.

The way I'm looking at it, the service requirement to enter the plan is 1 year of service, so 410(a) is not being violated because the plan satisfies the minimum service requirements for eligible employees. And no one is being excluded based on their work schedule. So I'm thinking that if soft freezes are okay, then you can exclude people hired after x date for a new plan. But I'm curious to hear what others say. Thanks in advance.

[Effen]

I don't see anything wrong with starting a new plan for people hired prior to a certain date, assuming you can comply with all of the applicable non-discrimination rules.

However, over time, as your covered group gets smaller, you will eventually fail 401(a)(26), but that may take years depending on where you start.

[figure 8]

Agree with the 401(a)(26) issue, though that's an issue with any soft freeze plan as well. But you agree that you could just amend the plan if it fails?

Say you start it up for anyone hired before 1-1-14 - so you have 2 groups, pre-2014 hires and people hired in 2014 and later. At some point, say for the 2019 year, you fail testing and need to add more people. You reclassify the 2014 and later group into 2 groups - people hired during 2014 and people hired in 2015 and later, and the 2014 hired group shall consist of eligible employees effective 1-1-19. Assuming all other testing works out, I'm thinking this should be okay. My main reason for second guessing is just because of some of the doubt cast here in this thread.

[Effen]

I would be more bothered by a series of amendments that continued to bring in new participants whenever you fail (a)26. I think the IRS might try to argue that your series of amendments is in essence a way to use an eligibility period of more than 21/1. You would need to count all their service so new entrants would be 100% vested, so ...... I think it would become a facts/circumstances issue.

If you are really just doing it to exclude as many people as you can for as long as you can, you might have a problem, however, if you have a legitimate reason for picking a prior eligibility date, you might be ok.

For example, if people not eligible for the db are receiving a higher PS, then you might be in a better position.

Run it past the lawyer and let them and the client make the decision.

[figure 8]

Thanks, Effen. Yea, I'm on the same page as you here. It would certainly be much better to come up with some sort of job classification breakdown instead of going by hire date.