DB/DC Testing and Permitted Disparity

[AndyH]

Testing a DB plan for 410(b) using the Average Benefits Test which for the ABT is combined with profit sharing allocations. Want to impute permitted disparity. Happen to be testing on an allocations basis (but that should not matter for this question).

The Plan years differ so the allocation rates are being separately computed and added together. Is permitted disparity imputed on one of the plans and then the two are added together, or are the allocation rates first combined, then permitted disparity imputed?

I thought it could be done either way but 1.401(a)(4)-9(b)(2)(iii) seems to say that if you choose to impute, you must impute on the aggregate allocation (or accrual) rate. That does not make sense to me. It seems like you're integrating two plans. Plus, how do you inpute one aggregated allocation rate if you have two sets of testing comp?

Opinions?

P.S. Said another way, what does 1.401(a)(4)-9(b)(2)(iii) say, and why?

[abanky]

I think you have to combine them first then apply PD.

[Tom Poje]

that is the way I would read it.

in other words you cant cheat

give the HCE a db benefit, give the NHCE a dc contribution and then only impute on the DC portion (therefore only increasing the NHCE E-Bar.)

[Blinky the 3-eyed Fish]

The aggregate allocation rates are the sum of the rates determined separately under each plan. So when imputing permitted disparity, seems to me you just do it for one of the plans, and add the two together. You know under the (a)(4) rules as referenced by 1.401(a)(4)-9(b)(2)(iii) that you can't impute permitted disparity for both plans. I don't see anything that dictates that you have to impute permitted disparity on one plan or the other. I would imagine you need to be consistent for all participants, but I didn't look closely enough to know for sure.

[AndyH]

Thank you all for your opinions. Much appreciated.

[AndyH]

Tom, are you agreeing with abanky who says add em together first, then impute, or Blinky who seems to be saying inpute on one of them and then add them together?

[SoCalActuary]

I believe the intent is that you add the basic benefits together as if it was a single plan, then imput disparity to the total.

My interpretation of the rules is that you are not allowed to take each plan benefit, add imputed disparity, and then add them together, as that would double count the addition.

[Blinky the 3-eyed Fish]

I believe the intent is that you add the basic benefits together as if it was a single plan, then imput disparity to the total.

We probably are talking semantics here, but as Andy points out, how would you do the calculation if the plan years were different and there was different compensation? One could have compensation in excess of the twb for one period and not the other. That's why I see no other way than to impute in one plan or the other. You get to the same result 99% of the time, but that 1% is Andy's world I suspect.

My interpretation of the rules is that you are not allowed to take each plan benefit, add imputed disparity, and then add them together, as that would double count the addition.

Of course.

[SoCalActuary]

I believe the intent is that you add the basic benefits together as if it was a single plan, then imput disparity to the total.

We probably are talking semantics here, but as Andy points out, how would you do the calculation if the plan years were different and there was different compensation? One could have compensation in excess of the twb for one period and not the other. That's why I see no other way than to impute in one plan or the other. You get to the same result 99% of the time, but that 1% is Andy's world I suspect.

My interpretation of the rules is that you are not allowed to take each plan benefit, add imputed disparity, and then add them together, as that would double count the addition.

Of course.

I don't have any great answers on the different plan years or compensation. If I were making the rules, I would select the calendar year compensation, and the average would be the average of calendar years. But that is just an opinion worth what you paid for it.

But each plan could have benefit levels below the level that recognizes full imputed disparity (ID). For example, a SH 401(k) plan would have 3% not subject to ID, and 2% subject to ID. The DB plan might have a modest benefit like 0.5% accrual, also below the level of reaching the maximum ID.

Do you just pick one plan and give it ID, leaving some benefits off the table?

[Blinky the 3-eyed Fish]

In that case you could impute in both plans as long as you didn't exceed the overall limits, just like you could if you had 2 safe harbor formula DC plans. I my examples I silently assumed you got to the max imputing one plan.

[SoCalActuary]

So plan a gives a person a 0.5% benefit accrual rate for 6/30/09 and plan b gives a 2% equivalent allocation rate for 12/31/09. For sake of illustration, the plan a 0.5% benefit accrual rate is worth a 1% equivalent accumulation using the DB plan's actuarial equivalence and the testing assumptions. The 2% plan b allocation gives a 1.25% benefit accrual rate using only the testing assumptions.

With separate plans you get a BAR of .5 + 1.25, while the EAR is 1% + 2%. So separate ID attribution of DB benefits gives 0.5% in plan a, and then you must compute the net 0.15% BAR from plan b, knowing what the plan a results used. Similarly, the EAR gets 1% in plan a and 2% in plan b as ID.

Doing this separately is a bother, when you really want to just add the two base rates and build the ID on the sum.

[Blinky the 3-eyed Fish]

I feel like we are going back and forth over sillyness. If you have compensation over and under the twb as I mentioned before, there is no basis to do it any other way than separately. As I said before, 99% of the time it's moot which way you do it, you get the same results.

[AndyH]

Agreed. If figures I think I have the other 1% situation, with one plan being small and widespread allocations using calendar pay and the other much larger allocations but covering only a small percentage of participants and using off calendar pay.

Thanks for the comments.

[Guest RRO]

I have a different question on the same topic. For 401(a)(4) testing on a DC/DB plan using either annual accrual or accrued-to-date methods with permitted disparity, what compensation can I use? Say the DB plan uses high 3 year comp for accrued benefits and the DC bases allocations on current year comp-can I test on current year comp in both plans? Does the answer change if the DB plan has a career benefit formula with unit accrual so that each year's accrual is based only on the current year's comp? How about a cash balance plan with a formula that is applied to current comp to get the hypothetical contribution for the year? It seems like the permitted disparity regs always refer to "average annual compensation"; I'm just not sure how that should be interpreted. Thanks.

[AndyH]

Assuming that you are testing on a benefits basis, You must use average annual compensation (3+ years) unless the measurement period is the current plan year in which case "plan year compensation" may be substituted for "average annual compensation". Plan year comp is comp for the current year only.