Permissive Aggregation

[emmetttrudy]

I have a client who has two plans - a DB Plan and a 401(k) Profit Sharing Plan. Two owners and about 5 or 6 employees. The owners participate in both Plans.

How do the permissive aggregation rules work? Do the two Plans need to be tested together for 401(a)(4)?

What about top heavy? The Plans are top heavy (tested together or separate), no matter which way you slice it. I always thought if the keys participate in both they need to be tested for top heavy together. If this is the case, is the top heavy minimum then 5% of annual compensation in the DC Plan?

[emmetttrudy]

I should add as well that the DB Plan passes the 410(b) coverage test and 401(a)(4) test by itself. So I don't think it needs to be aggregated with the 401(k) Plan for nondiscrimination testing. SO my biggest concern is how to calculate the top heavy minimums?

[SoCalActuary]

You did not mention that the PS /401(k) plan also meets a safe-harbor design for 401(a)(4) or that it passes the tests separately.

You must follow the terms of each document to determine how TH benefits are provided. You have no discretion on this issue.

[emmetttrudy]

For 2008 the PS/401(k) Plan does not meet a SH design, there are just discretionary PS employer contributions. It was changed to 3%SH as of 1/1/2009.

So, I have to calculate the TH minimum based on what the 401(k) Plan document says? The DB Plan's TH benefit is separate based on that Plan Document?

[emmetttrudy]

The DB Plan Document says if the employee is a participant in both Plans the DC Plan is to provide the 5% top heavy minimum. If the employee is just a participant in the DC Plan, the DC Plan is to provide a 3% top heavy benefit. However, depending on the owners' contributions, they'll need to get the 5% gateway anyway.

Are there any combined deduction limits I will need to worry about?

[SoCalActuary]

The DB Plan Document says if the employee is a participant in both Plans the DC Plan is to provide the 5% top heavy minimum. If the employee is just a participant in the DC Plan, the DC Plan is to provide a 3% top heavy benefit. However, depending on the owners' contributions, they'll need to get the 5% gateway anyway.

Are there any combined deduction limits I will need to worry about?

If I understand your fact pattern correctly, the DB plan provides a TH minimum at 2% per year of benefit. But any participant who is also benefiting under the DC plan, including the ability to defer, gets a 5% allocation in the PS plan portion. The participants in the DB plan who do not benefit in the PS plan allocation will get their TH benefit solely from the DB plan.

Now, any participants in the DC plan who are not eligible for the DB plan will only have a 3% required TH allocation.

You did not mention the allocation method for the DC plan, so I assume it has rate-group testing. In that case, you must consider both the DB & DC plans for 410(b) avg benefits percentage test. The DC plan can still pass 401(a)(4) on its own.

Further, you have to look to the combined plan deduction limits unless the DB plan is covered by the PBGC.