Non Discrimination Testing

[Gary]

Say a plan sponsor implements a new DB and a new 401k PS plan.

Say the DB plan provides past service credit up to 5 years.

If the plan is tested for non discrimination testing on the accrued to date basis would the following make sense?

DC plan account balance is based on one year of service since it is th eplan's first year.

DB plan is based on service to date (up to 5 pre participation years as well).

Plans are cross tested on using accrual method.

This results in relatively low accrual rates from DB plan since the accrued benefit is spread over all years of past service and the accrual under DC plan is spread over only one year of service.

Thanks.

[AndyH]

This results in relatively low accrual rates from DB plan since the accrued benefit is spread over all years of past service and the accrual under DC plan is spread over only one year of service.

Thanks.

I don't get this. The DB measurement date s/b based upon the years that the person is credited with benefits for, so 5/5 should be close to the PS 1/1, no?

I agree that the DC is more powerful, but the reason you cited doesn't work to me.

[Gary]

For example if a plan provides 10% per year DB pension then after the first year of the plan the owner participant would have accrued the 415 limit for one year of participation, yet it is spread over 6 years due to the 5 years of pre plan participation service.

The one year PS allocation (at say 7.5%) to the young non owner is powerful due to cross testing.

Thanks.

[AndyH]

yet it is spread over 6 years due to the 5 years of pre plan participation service.

Thanks.

Why is this? Is the formula 10% x Years of Credited Service (i.e. 60%) but limited to 10% by 415, or is it really 10% x years of participation, in which case the DB percent is 10%?

You cannot dilute the DB percentage by using a measurement period that isn't used in determining plan benefits, if that is what you are trying to do. The measurement period must generally either be the period of time that service is credited for benefit purposes or the period of time that the participant benefits under 410(b).

If you are trying to use 415 to distort the test, consider year two, where you have double the DB benefit in the numerator but only 14.29% more testing service, so your accrual would be 20%/7 compared to 10%/6 in year one. If you designed the arrangement to pass year one it would likely fail year two.

[Gary]

Yes, the AB is based on credited service. So the benefit is 60% of avg pay after the first plan year is limited to 415 limit.

So the question is, for the accrued to date ND testing, is it acceptable to use all past service (up to 6) for the DB plan accrual testing and then combine that with 1 year of service for the accrual under DC plan to arrive at a combined plan accrual rate?

Thanks.

[AndyH]

Yes, the AB is based on credited service. So the benefit is 60% of avg pay after the first plan year is limited to 415 limit.

So the question is, for the accrued to date ND testing, is it acceptable to use all past service (up to 6) for the DB plan accrual testing and then combine that with 1 year of service for the accrual under DC plan to arrive at a combined plan accrual rate?

Thanks.

I find your question to still be unclear but here is another try.

For the DB plan, you can choose to ignore or reflect the 415 limits.

So, your DB Normal Accrual Rate would be either:

60%/6 Years =10%

or

10%/6 Years=1.6667%

But if you choose the latter approach, in year two your accrual would be 20%/7 Years=2.8577% and in year three would be 30%/8 years etc. and would continue to escalate thereafter.

These are of course simplistic illustrations because there are variables such as compensation averaging to consider.

In any case, you would add the DB accrual rate to the DC EBAR which is based upon 1 year, or the PV of the DB accrual rate/Comp/Service to the DC allocation rate based upon one year.

Hope this helps.