Cash Balance Plan and Cross Tested 401(k)

[Guest mcw]

I have a client with a cross tested 401(k) and wants to add a cash balance plans covering the same employees. I have a few of questions.

1. I assume the 401(k) plan will have to provide the 7 1/2% gateway. I remember something about proposed regs that changed this but were withdrawn. I don't think the withdrawn language was included in the final regs. Is the 7 1/2% gateway still the rule?

2. If the answer to #1 yes, are terminated participants who still get interest credits considered benefiting under 410(b) so that they get the gateway? I know terminated participants will not have any compensation and 7 1/2% of zero is zero. Maybe this is how it is avoided but I want to make sure I am not missing somethign here.

3. I assume we will need to eliminate the end of year requirement in the 401(k) plan so that the employees who terminate during the year and benefit under the CB plan can get the gateway under the 401(k) plan. Is there any other items I should look for to make these two plans work together?

Thanks

[Tom Poje]

1. the gateway is whatever is required under the DB/DC combo rules, but not necessarily 7.5%

2.if someone receives a cash balance credit, that person has received a nonelective contribution, and is therefore eligible for the gateway.

3. most documents now contain gateway language, and aggregate gateway language, so you probably dobn't need to amend the plan, but you would have to see what they say. since most DB/DC plans are top heavy, my experience is that the cash balance credit for NHCEs is so small, that it fails to provide enough to satisfy top heavy, and you have to provide the people something in the DC plan anyway. again, watch out for top heavy language.

a person who has received, for example a 5% cash balance credit is not treated as having received a 5% contribution towards the gateway. you must convert the cash balance credit into an 'allocation' % (in simple terms since you might not be familiar with it, you cross tested, but backwards because you go from a DB into a DC)

however, for purposes of the gateway, you are allowed to take the average 'cross tested rate' of anyone who received the cash balance credit towards the gateway. for example 2 NHCEs might receive 5% cash balance credit, but when you convert to an allocation rate one might be at 4% and another might be at 3%. you are allowed to treat those 2 people as each having received 3.5% toward the gateway (and gateway only, not nondiscrim testing.)

you also have to make sure you pass minimum particpation. you have to convert the contribution credit into an accrual to determine that.

hopefully in a brief recapsule of these I have stated thing correctly. i imagine I might have left something out.

[mwyatt]

Tom, on point #2, are you sure about that? Conceptually, interest credit is essentially earnings on an account balance. From a common sense standpoint, I wouldn't construe this as "benefiting", any more than I would think earnings on a profit sharing balance would be considered benefiting (or for that matter, increase in the lump sum of the accrued benefit due to the passage of time as benefiting).

[Tom Poje]

on point 2 I was only considering a 'contribution' credit not an interest credit. I wouldn't consider someone who received interest credit as 'benefiting' either.

[AndyH]

See Tom, when you cross over to the dark side, there's lots of people that keep you on your toes.

[Guest mcw]

Thank you for your responses. I have run accross another problem. Here are the specific facts.

The client is going to submit the Cash Balance Plan for a determination letter and include demo 6 to get a ruling on the general test when combined with the 401(k) plan. They will have to provide the data for the ruling. This is a new plan (the 401(k) plan is already in existence). The first plan year will end December 31, 2010. Tax year is also 12/31. This will be a Cycle C plan so the next five year remedial amendment cycle ends on 1/31/14. Because this is more than two years from the current cycle, the plan will receive prority off cycle review. We would like to go ahead and submit so that the plan is not operating for 4 years before the IRS blesses the plan. However, there is no information to submit on demo 6 until after 12/31/10 (ther end of the first plan year). They will not have the info until after 1/31/11, the end of the current cycle. If the plan is submitted after 1/31/11, it will be in a different cycle and have to be updated for the 2010 cumulative list, which means the plan will have to be restated again. This means that the plan will be initially drafted this year based on the 2009 cumulative list and then restated next year based on the 2010 cumulative list. The client does not want to pay for two restatements to get a ruling. How does the client submit demo 6 without going through the multiple restatements as described above?

Thanks

[Tom Poje]

Andy:

yeh, but as they say, I was born ignorant and have been losing ground ever since.