tuni88 Posted March 25, 2009 Posted March 25, 2009 We are comtemplating freezing our DB plan and starting up a 401k alongside it. I know the 401k has certain tests internal to that plan so that matching contributions don't become too large for the higher paid employees, etc. (Those tests have acronyms that I forget just know - but that's not my question.) We've never had to do a similar test on our DB plan because, I am told, the plan is DESIGNED in such a way that whatever tests exist they are considered passed automatically. My question is (please help me re-phrase it if you can read my mind and know what I'm talking about): Are there any tests that have to be done considering the two plans in tandem? Can the new 401k be designed in a such a way that any tandem tests can be considered passed? A second question: We're a not-for-profit, but we can still have a 401k-type though, right?
david rigby Posted March 25, 2009 Posted March 25, 2009 I believe you are searching for the term "safe harbor". I'm a retirement actuary. Nothing about my comments is intended or should be construed as investment, tax, legal or accounting advice. Occasionally, but not all the time, it might be reasonable to interpret my comments as actuarial or consulting advice.
K2retire Posted March 25, 2009 Posted March 25, 2009 The 401(k) plan can be designed to meet certain safe harbor provisions and avoid some testing. If the two plans exist in the same year they will need to be jointly testing for top heavy. Money rolled from the DB plan into the 401(k) plan will be a "related rollover" for top heavy purposes.
JAY21 Posted March 25, 2009 Posted March 25, 2009 Sounds like to me the DB plan has a "safe-harbor" benefit formula (i.e, same formula for each participant) and if so there is no discrimination testing on the DB plan even if there is for the 401k plan. The plans can optionally be aggregated for discrimination testing, but that would only be necessary when the DB plan was NOT a safe-harbor formula (e.g,. formula for highly paid is maybe 10% of pay but for lower paid employees only 0.5% of pay, but then employees get good profit sharing contributions to make up for the DB disparity and plans are tested together). I agree with the plans "likely" be aggregated for top-heavy testing (e.g., if a key employee is in both plans or plans aggregated for discrimination testing).
SoCalActuary Posted March 26, 2009 Posted March 26, 2009 We are comtemplating freezing our DB plan and starting up a 401k alongside it. I know the 401k has certain tests internal to that plan so that matching contributions don't become too large for the higher paid employees, etc. (Those tests have acronyms that I forget just know - but that's not my question.) We've never had to do a similar test on our DB plan because, I am told, the plan is DESIGNED in such a way that whatever tests exist they are considered passed automatically. My question is (please help me re-phrase it if you can read my mind and know what I'm talking about): Are there any tests that have to be done considering the two plans in tandem? Can the new 401k be designed in a such a way that any tandem tests can be considered passed? A second question: We're a not-for-profit, but we can still have a 401k-type though, right? You should also review the rules for frozen DB plans that apply to 401(a)(26). You will probably pass this test for the next few years, depending on your employee turnover. High turnover means fewer years before you fail. If your HCEs are not part of the plan, or if your plan is perpetually underfunded, this issue will be less of a problem
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