DB/DC Combo - 5% to 7.5% Gateway

[John Feldt ERPA CPC QPA]

DB/DC combined for 401(a)(4). Top Heavy 5% provided in the DC plan. Under 1.401(a)(4)-9(b)(2)(v)(D)(1), the Gateway is 5% of compensation, provided the "HCE rate" does not exceed 25% of compensation.

The "HCE Rate" appears to be defined in that same paragraph as "the aggregate normal allocation rate of the HCE with the highest such rate". Then (E) tells us the aggregate normal allocation rate is determined in (b)(2)(ii) without permitted disparity.

In (b)(2)(ii), the aggregate normal allocation rates are determined for DC in 2©(2) and for DB in 8©(2), and then added together. In 2©(2), the DC portion appears to include all employer contributions and forfeitures, divided by compensation (or average compensation if using that for this test?). Does this amount then exclude employee deferrals, but include match? I assume that is the case.

Match was included in the average benefits test, but not in the rate group tests - so I just want to verify this one.

[AndyH]

Only nonelective (non-matching) ER contributions are included in the rate group portion of the test.

[John Feldt ERPA CPC QPA]

Only nonelective ER contributions are included in the rate group portion of the test.

Okay, that we already know is true. Suppose those rate groups all pass just fine.

The question is, what is the minimum gateway (5%, 6%, 7% or 7.5%). To find out which applies, we have to calculate the "HCE Rate". Are only employer nonelectives included in the numerator for the HCEs?

For the DB portion of this HCE rate, we'll use 8.5% UP84 for the PVAB (to see if that gets us below one of the 5% bands points).

[AndyH]

It is the PV of the DB using the testing rates plus the nonelective DC. Note, however, that you can average the DB NHCE PVABS for gateway purposes.

[Guest RBlaine]

It is the PV of the DB using the testing rates plus the nonelective DC. Note, however, that you can average the DB NHCE PVABS for gateway purposes.

I'd like to bring this up to make sure I understand this rule:

1.401(a)(4)-9(b)(2)(v)(D) Minimum aggregate allocation gateway. A DB/DC plan satisfies the minimum aggregate allocation gateway of this paragraph (b)(2)(v)(D) if each NHCE has an aggregate normal allocation rate that is at least one third of the aggregate normal allocation rate of the HCE with the highest such rate (HCE rate), or, if less, 5% of the NHCE's compensation, provided that the HCE rate does not exceed 25% of compensation. If the HCE rate exceeds 25% of compensation, then the aggregate normal allocation rate for each NHCE must be 5% increased by one percentage point for each 5-percentage-point increment (or portion thereof) by which the HCE rate exceeds 25% (e.g., the NHCE minimum is 6% for an HCE rate that exceeds 25% but not 30%, and 7% for an HCE rate that exceeds 30% but not 35%). For purposes of this paragraph (b)(2)(v)(D), a plan is permitted to treat each NHCE who benefits under the defined benefit plan as having an equivalent normal allocation rate equal to the average of the equivalent normal allocation rates under the defined benefit plan for all NHCEs benefitting under that plan.

For "NHCE's benefitting under the plan" do they mean only the NHCE's receiving at least a .5% of accrual or ANY accrual?

If I have 5 NHCE's who have the following:

EE# DB Accrual % DB NAR DC Alloc Rate

1 .5% .30% 5%

2 .2% .80% 5%

3 1.0% .60 5%

4 .4% .70% 5%

5 .6% .50 5%

6 0% .00 5%

Average NAR of 1-5 = .58%

To use this rule, does it only affect ee#'s 1, 3 and 5 or the first 5?

If my Gateway % has to be 6%, I need to increase the DC allocation to 5.42% for employees 1-5 and 6% to employee 6 (assuming plan allows this). Or are EE's 1, 3 and 5 treated as having NAR's of .47 and EE 2 and 4 stay at their normal NAR?

[ScottR]

For "NHCE's benefitting under the plan" do they mean only the NHCE's receiving at least a .5% of accrual or ANY accrual?

If I have 5 NHCE's who have the following:

EE# DB Accrual % DB NAR DC Alloc Rate

1 .5% .30% 5%

2 .2% .80% 5%

3 1.0% .60 5%

4 .4% .70% 5%

5 .6% .50 5%

6 0% .00 5%

Average NAR of 1-5 = .58%

To use this rule, does it only affect ee#'s 1, 3 and 5 or the first 5?

If my Gateway % has to be 6%, I need to increase the DC allocation to 5.42% for employees 1-5 and 6% to employee 6 (assuming plan allows this). Or are EE's 1, 3 and 5 treated as having NAR's of .47 and EE 2 and 4 stay at their normal NAR?

You've got it exactly right, IMO. Average NAR = .58% Forget about the 0.5% threshold for purposes of the gateway test.

... Scott

[Guest RBlaine]

Thanks, Scott, that is the way I was leaning since that section of the regs doesn't use the words "meaningful benefit" or that section of the code.

Anyone disagree?