IRS Determination of DB plan

[Gary]

An employer sponsors a DB plan and a 401k profit sharing plan.

The DB plan provides a formula of 10% per year for the owner and an accrual of 0.5% per year for the employees.

The 401k profit sharing plan provides an allocation of 7.5% for each NHCE to meet gateway.

On a combined plan basis the plans pass the non discrimination tests.

Based on the above facts, does the above appear to be a reasonable non discriminatory plan design?

The IRS is just reviewing the DB plan and claims the plan formula is discriminatory.

Any suggestions on how plan sponsor should submit fopr determination with this type of plan design? That is, somewhere report that the plans meet discrimination on a combined plan basis. I don't work on plan determination process, so without researching the plan determination forms, I am thinking it would have a section to indicate plans pass on a combined basis.

Interested in comments.

Finally, what if Db formula provided 0.5 to NHCEs and offset DC value? On the basis that the plan passes general test and is of course not a safe harbor offset plan? Just another perspective for consideration.

Thank you.

[Andy the Actuary]

Did the IRS articulate their position of why it was discriminatory? I.e., what code sections did it violate and why?

[SoCalActuary]

The plan passes all the bright-line discrimination tests. QED, it does not discriminate.

[rcline46]

THe plan had to be submitted with the testing which combined the DC plan. This was the schedule Q attachement with a specific request during the determination process. If it was, fight it, if it was not then submit the test, and of course a higher 8717 fee.

[tymesup]

Looks like this design could work. Please keep us posted what our fiend from the Infernal Revenue Service says on the subject. It would be double plus ungood if this design doesn't work.

[Gary]

The attorney who filed for determination letter filed this plan by itself, though the Form 5307 does state that the employer sponsors a DC plan.

The IRS of course says that this plan on its own merits violates 401a4. No surpirse, without the DC plan combined.

The 5307 asks if plans are combined for coverage purposes and the Form state "No".

Of course if the answer was "yes" than the DC plan would have to be combined for discrimination testing.

It is simple enough to answer "yes" and combine plans for coverage and non dsicrimination and that would work just fine.

As an academic question, though, is it allowable to answer "no" for combining plans for coverage and then still combining plans for non discrimination testing? Because while the DB plan would not pass non discrimination on its own it would meet coverage on its own. Just curious. It doesn't appear that Form 5307 explicitly provides for not combining plans for coverage and then combining plans for non discrimination, although it is possible that the attachment to item 9a provides for that.

Thanks.

[John Feldt ERPA CPC QPA]

If the 5307 had said "Yes" to "if plans are combined for coverage purposes" then you would not likely have the agent making the statements that are being made.

Is it allowable to answer "no" for combining plans for coverage and then still combining plans for non discrimination testing?

That would seem to affect the outcome of the determination letter, and would not be recommended. You should be able to amend the question to Yes and that should settle the issue. If you applied for a full scope determination, then you'll need to do Demo 6.