DB/DC Gateway, HCE Rate

[John Feldt ERPA CPC QPA]

We're working with a cautious client that needs to better understand how the HCE Rate (for getting the 5%, 6%, 7%, or 7.5% gateway) is determined in a DB/DC combo plan.

We explained that it is the sum of the DB HCE Rate and the DC HCE rate using the testing assumptions.

They understood the DC HCE Rate, no problem.

But the DB is a cash balance plan, and, for example, for one HCE the hypothetical credit to the account is just over 24% of pay. Of course, the DB HCE Rate did not come out very close to 24%. This is causing their question.

To calculate the HCE Rate, we explained that it is not the credit divided by the pay, but it's a conversion from the hypothetical credit by accumulating it to NRD at the current crediting interest rate, converted to an annuity under actuarial equivalence, with that annuity's present value calculated at the testing rate, divided by pay. Note: usually they just start nodding after the actuary says "conversion from the hypothetical" and then they can't remember what they even asked in the first place.

But not this time. We could tell that this client was not convinced. They want to know if the regs or other official guidance can confirm that. I'm looking at 1.401(a)(4)-9(b)(2)(ii) and 1.401(a)(4)-9(b)(2)(v)(E). Is there somewhere else that would spell it out even better?

[SoCalActuary]

You have a difficult educational challenge.

It was a good start to quote the reg's.

But the math is best illustrated using some of the educational materials available in the actuarial community.

SOA study materials could help. The Larry Deutsch seminar also has an extensive set of worksheets and spreadsheets to illustrate the concepts.

Another option is to appeal to "authority" by having the client get the exact same answer from other actuarial firms.

[John Feldt ERPA CPC QPA]

I do have Larry's illustrations (they're a bit old now), but it does show the calculation methodology - thanks!