Average Benefits Test

[Guest DCquestioner]

This has to do with a cash balance plan, but I think the general question relates more to the average benefits test itself, and I think the question would be right up Tom Poje's alley, so I'm posting here...

Scenario:

Employer sponsors a cash balance plan and a 401(k) plan. Both plans pass coverage on their own. The 401(k) has an integrated allocation and passes on it's own.

I would like to test the Cash Balance plan separately for non-discrim. I'm not passing rate group testing, so I must use the average benefits test. The average benefits test is a 2 step process. First I have to pass the non-discriminatory classification test, and then if that passes I go to the average benefits % test.

My question:

For purposes of the nondiscriminatory classification test, do I set up my rate groups only using the cash balance benefits (since my rate group testing is only based on the cash balance plan)? or do I need to consider the profit sharing component as well because this is part of the average benefits test?

Thank you for your comments.

[Tom Poje]

ah yes. aggrevation..errrrr

we have people here in the office, so somehow or other I am suppose to get a common time for all to meet together for ASPPA DC-1 class. Much less that task is next to impossible for everyone, Tom is much too lazy, so he is trying to put the DC-1 into powerpoint and it just happens lazy Tom was working on that section of the book.

and those ugly terms raise their heads.

Mandatory Disaggregation

Permissive Aggregation

Elective Disaggregation

ok, for the avg ben pct test think of it as Mandatory Aggregation, no matter what. just about everything under the sun that could be considered a contribution counts and gets included. (aside from catch-ups and after tax)

for your nondiscrim classification, only inlcude amounts for the plans you used for coverage. so if you disaggregated for coverage the cash balance and the profit sharing, then you do the same for the nondiscrim. run 2 tests and only count the amounts from the cash balance when you test the cash balance. But you still count the 'bodies' as zero if you have someone who is in the ps and not the cash balance. you can't get away from that.

If my brain recalls correctly, you could even test the plans totaly separately, e.g. an avg ben pct test using cash balance only, and an avg ben pct test using the dc contributions only (including deferral and match). if you do that you must test the dc plan on a dc basis and the db plan on a db basis.

[Guest DCquestioner]

That helps a lot. Whatever you do, don't get too lazy to check the message boards!

Good luck with the class. Hopefully you get a bonus if your students perform well...

Thank you!

[ERISAnut]

Now, you can permissively aggregate the two plans without having to resort to the average benefits test. Not sure if that would help, but may be worth a try.

[AndyH]

The questioner was not clear about how the cash balance plan was being tested. If the equivalent accrued benefits are being tested on a benefits basis, the k plan can be ignored with respect to the cb plan, as the questioner seems to want to do, and as Tom noted in his last two sentences. But as a practical matter the deferrals often help the AB test within a cb/db context so this would often not be a good idea.