DB/DC Combo -- What testing needed

[Andy the Actuary]

An employer sponsors a rich DB plan (2% average compensation per year of service, max 60%) and non-safe-harbor 401(k) plan with 100% matching of first 3%. DB Plan covers 300 employees of which 270 contribute to 401(k) plan. 9 of 300 are HCE. Most new hires anticipated to be employed as NHCEs but a few may ultimately work their way up. Some present NHCEs will ultimately become HCEs.

Employer is considering:

(1) Present employess stay in DB and 401(k) plan.

(2) Future hires not in DB plan but in 401(k) plan.

(3) Future hires get 3% profit sharing contribution, a feature to be added to 401(k) plan.

Apparent coverage issues:

(1) Eventually DB plan will waste away to fewer than 50 employees so 401(a)(26) test will fail.

(2) At some point -- but not for awhile -- DB plan may fail 410(b)

(3) No problem with DC until DC plan covers HCE. At that time, would be concerned about 410(b). Might (if can't pass ratio test) have to aggregate with richer DB for average benefit testing. It would seem if 3% benefit is in 401(k) plan, might have to give gateway to others (i.e., to current employees) but if 3% in separate ps plan, no gateway issues, since all employees under the plan get the same %.

WOULD APPRECIATE COMMENTS ON THE ABOVE AND IF I'VE MISREAD THE SITUATION AND THERE ARE OTHER ISSUES THAT NEED TO BE CONSIDERED.

[Mike Preston]

An employer sponsors a rich DB plan (2% average compensation per year of service, max 60%) and non-safe-harbor 401(k) plan with 100% matching of first 3%. DB Plan covers 300 employees of which 270 contribute to 401(k) plan. 9 of 300 are HCE. Most new hires anticipated to be employed as NHCEs but a few may ultimately work their way up. Some present NHCEs will ultimately become HCEs.

Employer is considering:

(1) Present employess stay in DB and 401(k) plan.

(2) Future hires not in DB plan but in 401(k) plan.

(3) Future hires get 3% profit sharing contribution, a feature to be added to 401(k) plan.

Apparent coverage issues:

(1) Eventually DB plan will waste away to fewer than 50 employees so 401(a)(26) test will fail.

Have you done any projections as to when this might happen? Do you really think your successor's successor will be grappling with the same Code sections?

(2) At some point -- but not for awhile -- DB plan may fail 410(b)

Have you done any projections as to when this might happen? Do you really think your successor's successor 's successor will be grappling with the same Code sections?

(3) No problem with DC until DC plan covers HCE. At that time, would be concerned about 410(b). Might (if can't pass ratio test) have to aggregate with richer DB for average benefit testing. It would seem if 3% benefit is in 401(k) plan, might have to give gateway to others (i.e., to current employees) but if 3% in separate ps plan, no gateway issues, since all employees under the plan get the same %.

Well, let's see. There are 9 out of 300 HCE's at the moment. If you add an HCE before you add roughly 21 NHCE's, that could be an issue. But with ABT, result would be requiring no more than 8.

Perhaps not allow new HCE's until at least 8 NHCE's are eligible? Perhaps this is something that can easily be projected?

It is hard for me to imagine that this company will ever have a problem and if they do, it will be easily addressed.

I am presuming that the plans as a whole easily pass the ABT. Hard to imagine it not.

What am I missing that is causing you concern?

[AndyH]

I'm with you until you near the end when you reference the gateway.

If you are testing on ABT for coverage only, gateway does not apply.

I suspect you will need to test the DB for the ABT sooner than you think, but with aggregation that should be passable; 401(a)(26) would be the likely show stopper as you note.

[Andy the Actuary]

Thank you both. Never been down this road before. Don't expect any issues (especially during my evaporating working career) but nonetheless, various validation valuates very valuable.

No numbers have been crunched yet but life expectancy of DB plan was one of them as will be cost savings and benefits comparisons.