DB/DC Combined Plans - Non Discrimination Testing

[Gary]

A client of mine has a DC plan that has been in existance for one year and a DB plan tht has been in existance for one year.

Since the DB plan never had any prior NHCEs they use all past service in the calculation of accrued benefits.

For the second plan year we will be adding an NHCE.

So the plan will have 2 HCEs and 1 NHCE for the 2nd plan year.

In doing the non discrimination testing we will plan on using the accrued to date method for the DB plan.

1.401(a)(4)-9(b)(2)(iv) seems to indicate that the same measurement period must thus be used for the DC plan for consistency purposes. That is, I could not use the annual method for the DC plan if I use the accrued to date method for the DB plan.

Is my understanding on that point correct?

If so, then I will use the accrued to date method for the DC plan as well, which I presume will be based on the 2 HCEs account balance at the end of the first plan year plus the second year allocations divided over a measurement period of 2 years, since even though they may have worked ten years, there have been only two years of allocations. Is that correct?

However, the DB plan can have ten years (i.e. all past service) in the measurement period since the accrued benefits are based on all past service.

Thanks.

[SoCalActuary]

If you are testing on annual accrual method, the past service grants have already been earned before the testing period. Do you have a safe-harbor design on the db plan accruals? If so, you don't even have to test it.

[AndyH]

Testing service would relate to the years benefiting or years of allocations, yes. I'm not sure how you are skipping the second year of investment earnings, though. You either include none or all of the investment earnings attributable to allocations during the two year measurement period.

Also, even though your measurement period includes all prior years you still only have one year of testing service for the NHCE if he has only one year of allocations.

Or maybe I am not completely understanding your question.

Off hand, I think your first point is correct but somebody who has time to look it up can confirm that more definitively.

[Gary]

Another way of putting it.

For the DBPP I am using all past service (for eg. 10 years) since at plan inception past service is counted for the accrued benefit. So I am not using only the two years of participationin this case.

For the DC plan I believe two years are appropriate since allocations have only been provided for the two years of plan participation.

Basically, I am applying the princiapl that a DB plan can provide past service credit but a DC plan typically does not.

Thanks.

[SoCalActuary]

I ask again, are you relying on the accrued to date method for non-discrimination compliance? Is that your only successful testing method? Because a safe-harbor design doesn't need the test, and an annual accrual method ignores any benefits accrued prior to the current year, i.e., all the past service credits for the db plan.