Combined cross tested plan

[Gary]

A combined plan design I have used includes:

- safe harbor 401k

- profit sharing plan

- defined benefit plan (not cash balance)

I then combine all three plans for non discrimination testing on an accrual basis.

I convert the current year PS allocation to an accrual rate and I determine the DB accrual using either the accrued to date method (i.e. inclusive of past service) or the annual method.

I meet the gateway based on the annual allocation of the highest HCE.

Does anyone see any problem with the above approach?

[Mike Preston]

You can't mix annual testing of PS with accrued to date of DB plan, IMO.

[Gary]

Is accrued to date for a PS plan allowed?

Otherwise, how can you use accrued to date for a DB plan when combining plans for non discrimination testing?

[Mike Preston]

Yes, accrued to date for a PS is allowed. You use the account balance.

[Gary]

Mike

Ok. That is how I had been doing it, but then I thought that you could not use the account balance approach. I know you use account balance for top heavy testing, but was not sure if it could be used for ND testing. That means investment returns are factored in?

Of course with a new combined DC/DB plan it works out as accrued to date for PSP is only based on the one year, where the DB plan can be based on past service at inception.

Do you have a cite that supports the accrued to date method for PS plans? I will dig for it, but in case you readily knew.

Thank you.

Gary

[Mike Preston]

Yes, it includes earnings.

The same site that allows all cross testing. The -8 portion of the 401(a)(4) regulations.

[Gary]

Another issue was raised to me that relates to this thread.

A pension attorney came to me and said "according to an actuary, combined plans cross tested plans with a defined benefit plan component must use a cash balance plan and cannot use a traditional defined benefit plan". According to the attorney the actuary says it will vilate some accrual rules. I presume he may mean accrual rules under 411 or accrued to date non discrimination testing.

In any event, I don't see a problem with using a traditional defined benefit plan, combined with a profit sharing and 401k plan and testing them on a combined basis.

Any comments on the allegation made by the "mystery actuary"?

[Mike Preston]

The pension attorney is a fool for believing that particular actuary. Surely this isn't the first time the attorney has been blessed with such fascinating advice.