DB DC Combo

[John Feldt ERPA CPC QPA]

I have heard several DB/DC combo speakers make comments that both DB and DC plans, if combined for nondiscrimination testing, should avoid benefits, rights, and features (BRF) testing by making sure the plans have the same/similar BRF provisions. From an grey book Q&A, a 3-year cliff and a 6-year graded schedule are considered comparable and thus not subject to BRF testing.

I think BRF would include in-service distribution timing options? Suppose the DC plan has age 59.5 for an in-service option for all acoounts, but the DB has age 62. That appears to be a BRF, but how/what gets tested there?

What about an accrual requirement - suppose the DB requires 1000 hours for accrual, but the DC plan has no accrual requirement - is that a BRF that must be tested, and if so, how/what gets tested there, doesn't the 401(a)(4) test itself do exactly that?

[SoCalActuary]

What about an accrual requirement - suppose the DB requires 1000 hours for accrual, but the DC plan has no accrual requirement - is that a BRF that must be tested, and if so, how/what gets tested there, doesn't the 401(a)(4) test itself do exactly that?

I suggest that BRF testing is different from testing the amount of benefit. 401(a)(4) general tests look at amount, of which zero benefit is a part. BRF is more like 410(b) testing. What percent of HCEs are eligible for a particular benefit - right- feature, vs the availability to NHCEs. For example, if HCEs get permanent insurance with cash values but NHCEs get term insurance, then the HCEs get a benefit by being able to buy the policy from the plan.

[John Feldt ERPA CPC QPA]

Okay, that's as described in 1.401(a)(4)-4(b)(1).

So, suppose a DC plan has no hours or last day requirement for receiving an allocation, but the DB plan does have a 1000 hour requirement for receiving a benefit accrual (so the DB plan can be amended in the first few months of the year to reduce benefits if necessary), does that mean that the headcount of employees receiving the accrual in the DB plan must also pass the 70% test?

I'm just trying to understand exactly why it has been recommended that the accrual conditions be mirrored. I've heard them even recommend that the 2 plans leave out all accrual/allocation requirements - no hours for the DB and no hours or last day in the DC. If the 70% test (described in the above paragraph) is the main reason, I'd rather keep the 1000 hours in at least for the DB plan. Am I missing something else?

[Blinky the 3-eyed Fish]

Accrual requirements are not a concern. If you pass coverage, you are fine. The concerns lie in true BRFs like in-service distribution timing option you mentioned and plenty others. I will leave it to you to research what are BRFs, but know that making the provisions the same eliminates this concern.

FYI, in most DB/DC combo arrangements the majority of NHCEs get greater DC benefits so if that plan has more features than the DB plan, the BRF testing is usually satisfied. Of course each situation is different.

[Everett Moreland]

I think BRF would include in-service distribution timing options? Suppose the DC plan has age 59.5 for an in-service option for all acoounts, but the DB has age 62. That appears to be a BRF, but how/what gets tested there?

See:

1. 1.401(a)(4)-9(b)(3):

(3) Optional rules for demonstrating nondiscrimination in availabilty of certain benefits, rights, and features. (i) Current availability. A DB/DC plan is deemed to satisfy section 1.401(a)(4)- 4(b)(1) with respect to the current availability of a benefit, right, or feature other than a single sum benefit, loan, ancillary benefit, or benefit commencement date (including the availability of in- service withdrawals), that is provided under only one type of plan (defined benefit or defined contribution) included in the DB/DC plan, if the benefit, right, or feature is currently available to all NHCEs in all plans of the same type as the plan under which it is provided.

(ii) Effective availability. The fact that it may be difficult or impossible to provide a benefit, right, or feature described in paragraph (b)(3)(i) of this section under a plan of a different type than the plan or plans under which it is provided is one of the factors taken into account in determining whether the plan satisfies the effective availability requirement of section 1.401(a)(4)-4©(1).

2. 1.401(a)(4)-4(d)(4):

(4) Permissive aggregation of certain benefits, rights, or features. (i) General rule. An optional form of benefit, ancillary benefit, or other right or feature may be aggregated with another optional form of benefit, ancillary benefit, or other right or feature, respectively, and the two may be treated as a single optional form of benefit, ancillary benefit, or other right or feature, if both of the following requirements are satisfied:

(A) One of the two optional forms of benefit, ancillary benefit, or other rights or features must in all cases be of inherently equal or greater value than the other. For this purpose, one benefit, right, or feature is of inherently equal or greater value than another benefit, right, or feature only if, at any time and under any conditions, it is impossible for any employee to receive a smaller amount or a less valuable right under the first benefit, right, or feature than under the second benefit, right, or feature.

(B) The optional form of benefit, ancillary benefit, or other right or feature of inherently equal or greater value must separately satisfy paragraphs (b) and © of this section (without regard to this paragraph (d)(4)).

(ii) Aggregation may be applied more than once. The aggregation rule in this paragraph (d)(4) may be applied more than once. Thus, for example, an optional form of benefit may be aggregated with another optional form of benefit that itself constitutes two separate optional forms of benefit that are aggregated and treated as a single optional form of benefit under this paragraph (d)(4).

(iii) Examples. The following examples illustrate the rules in this paragraph (d)(4):

Example 1. Plan A is a defined benefit plan that provides a single sum optional form of benefit to all employees. The single sum optional form of benefit is available on the same terms to all employees, except that, for employees in Division S, a five- percent discount factor is applied and, for employees of Division T, a seven-percent discount factor is applied. Under paragraph (e)(1) of this section, the single sum optional form of benefit constitutes two separate optional forms of benefit. Assume that the single sum optional form of benefit available to employees of Division S separately satisfies paragraphs (b) and © of this section without taking into account this paragraph (d)(4). Because a lower discount factor is applied in determining the single sum optional form of benefit available to employees of Division S than is applied in determining the single sum optional form of benefit available to employees of Division T, the first single sum optional form of benefit is of inherently greater value than the second single sum optional form of benefit. Under these facts, these two single sum optional forms of benefit may be aggregated and treated as a single optional form of benefit for purposes of this section.

Example 2. The facts are the same as in Example 1, except that, in order to receive the single sum optional form of benefit, employees of Division S (but not employees of Division T) must have completed at least 20 years of service. The single sum optional form of benefit available to employees of Division S is not of inherently equal or greater value than the single sum optional form of benefit available to employees of Division T, because an employee of Division S who terminates employment with less than 20 years of service would receive a smaller single sum amount (i.e., zero) than a similarly-situated employee of Division T who terminates employment with less than 20 years of service. Under these facts, the two single sum optional forms of benefit may not be aggregated and treated as a single optional form of benefit for purposes of this section.