coverage testing for a closed db pension plan - several questions

[Guest GaryGaryGary]

First question:

I have a db pension plan that is up for coverage testing as of 12.31.2007 for the new three year cycle. It has been one year since the plan was closed (12.31.2006) to new entrants (existing participants continue to accrue pension benefits) so that there are no new entrants and I know that all members are over age 21/1. New hires go into a DC plan.

The plan is sponsored by a company within a controlled group.

How do you feel about performing the DB plan coverage test utilizing the age 21/1 statutory exclusion for the remaining members of the controlled group OR do you feel that I should not be using any exclusions in performing the test?

Second question:

The aforementioned closed pension plan offered a lump sum option on benefits accrued through 12.31.2000 with no lump sum option attached future accruals (including, of course, accruals for post 2000 new hires). I test and pass coverage each cycle for this benefits, right and feature (BRF). Since the plan has now been frozen to new entrants as of 12.31.2006, can't I use the passing 12.31.2006 coverage results forever, or must I perpetually test this BRF? If this is not the case, then if too many NHCE's retire or terminate I can fail coverage sometime down the road.

Third question:

Because of the introduction of a small stock acquisition in 2007 my coverage test result is 69%. I fail. I toyed with the idea of excluding the stock acquisition people (on the grounds of the transition rule) but felt that as long as I was required to do a real test this year I could not ignore them. Do you agree?

Fourth and last question:

How do you feel about doing the coverage test at 12.31.2006 instead of 12.31.2007? My calculations indicate that I would pass at that date. If I tested then, I would have a three year cycle that began with the 2006 plan year and could take advantage of the mergers and acquisition transition period and ignore the 2007 stock acquisition.

Thanks for the patience in reading this and thanks to all who respond.

[Guest GaryGaryGary]

First question:

I have a db pension plan that is up for coverage testing as of 12.31.2007 for the new three year cycle. It has been one year since the plan was closed (12.31.2006) to new entrants (existing participants continue to accrue pension benefits) so that there are no new entrants and I know that all members are over age 21/1. New hires go into a DC plan.

The plan is sponsored by a company within a controlled group.

How do you feel about performing the DB plan coverage test utilizing the age 21/1 statutory exclusion for the remaining members of the controlled group OR do you feel that I should not be using any exclusions in performing the test?

Second question:

The aforementioned closed pension plan offered a lump sum option on benefits accrued through 12.31.2000 with no lump sum option attached future accruals (including, of course, accruals for post 2000 new hires). I test and pass coverage each cycle for this benefits, right and feature (BRF). Since the plan has now been frozen to new entrants as of 12.31.2006, can't I use the passing 12.31.2006 coverage results forever, or must I perpetually test this BRF? If this is not the case, then if too many NHCE's retire or terminate I can fail coverage sometime down the road.

Third question:

Because of the introduction of a small stock acquisition in 2007 my coverage test result is 69%. I fail. I toyed with the idea of excluding the stock acquisition people (on the grounds of the transition rule) but felt that as long as I was required to do a real test this year I could not ignore them. Do you agree?

Fourth and last question:

How do you feel about doing the coverage test at 12.31.2006 instead of 12.31.2007? My calculations indicate that I would pass at that date. If I tested then, I would have a three year cycle that began with the 2006 plan year and could take advantage of the mergers and acquisition transition period and ignore the 2007 stock acquisition.

Thanks for the patience in reading this and thanks to all who respond.

[AndyH]

I'll offer an opinion. Just that, one opinion.

First, I will assume that your 3 year testing cycle situation is that you tested 12/31/2004 and used that for 05 and 06, in which case you need to test 2007.

1. For your 2007 test, you can make use of whatever testing options you want, including the otherwise excludable rule. I see no reason why you couldn't.

I don't think you should automatically rely on the 2007 test for another 3 years either way, however. The impact of the soft freeze, the passing margin, and any other demographic changes would have to be considered. No way I would assume 2007 is good for another 3 years automatically, if that is the underlying question.

2. Don't you really have an A+B situation, where A is tested and passes, and you have essentially a "fresh start" amendment, followed the addition of B? From that perspective, I think you would only need to test B for BRF go-forward.

3. Same answer as 1.

4. Same answer. I don't think you can assume the 3 year cycle is ok go-forward due to the soft freeze unless you can "reasonably conclude" that the soft freeze or any other change is not significant.

Just one opinion. Hope it helps stir some further feedback.

[ak2ary]

I mostly agree with Andy but a few points

1. 410(b) offers the option to treat otherwise excludables as a separate plan to "plans benefiting otherwise excludable employees". Your plan does not benefit any otherwise excludable employees. However, if no one under 21 & 1 benefits under your plan, you can treat all those failing the max 410(a) requirements as simply excludable

2. You can eliminate a BeRF prospectively if, as of the date of elimination the BeRF covers a nondiscriminatory classification of employees. So in 2000, the lump sum was available to a 410(b) group, so you were able to eliminate prospectively with respect to future accruals for everyone. My reading is that you did that. Thus, you didn't need to test the BERF each year since 2000.

3. Assuming the transaction meets the requirements of 410(b)(6)©, if the plan met the coverage requirements of 410(b) on the day before the transaction, it meets the requirements for the year of the transaction and the year following the transaction. Nowhere does it say that you get to treat the acquired employees as excludable employees. The relief under 410(b)(6)© extends also to 401(a)(26) but not to 401(a)(4). Some people believe that in performing the still-required 401(a)(4) analysis, you get to treat the acquired employees as excludable, which seems reasonable but has no authority.

In determining whether you get the 410(b) relief, you cannot rely on a 3-year old test. There is nothing in 410(b) that says that there is a magic three year testing cycle and that if you pass on the first day of the cycle, you pass for the entire cycle. Instead, the law requires that you meet 410(b) everyday. Rather than constantly collecting data however, plans can demonstrate compliance once every three years, unless there has been a significant change in the data. The regs do not define a significant change clearly. When asked, the IRS has said that any change in the data that would cause a passing test to become a failing test, is a significant change in the data. Essentially..."if you need the three year testing cycle to be able to pass the test, you are not allowed to use the three year testing cycle". The fact that you pass the test for 2007 by assuming the acquired employees are excludable, would indicate that the plan met 410(b) immediately before the acquisition. This would allow the plan 410(b) relief for 2007 and 2008.

4. Because the stock acquisition is a data change that causes a test to go from passing to failing, it is a significant change, that must be considered for testing (and effectively ends the 3 year cycle). Thus, as indicated in answer 3, while you have 410(b) transition relief for 2007 and 2008, you may have to test for 2009.

It should be noted that you indicated that the plan would fail coverage if you considered the acquired people. Clearly that makes the acquisition a significant data change. Many plans that are frozen to new members claim that even though their ratio pct test result is above 70%, the meet coverage using the Avg Bfts Test. Assuming they have a big passing margin in the ABPT, their margin in the ABT is larger than their margin in the RPT. Thus, fewer events would be considered signififcant data events. Further, plans frozen to new entrants almost always will eventually wind up using the ABT as their primary coverage test....so they might as well start now.

Finally as mentioned above...there is no 401(a)(4) relief for acquisitions and dispositions, but there is also no guidance on how to test in that situation