Aggregated DB/DC Combo with Floor Offset

[Guest facade]

Given the following scenario...

Cash Balance plan using separate allocation groups & a Floor Offset Arrangement

401(k) New Comparability Profit Sharing Plan

Groups: Owners & All Others

CB Allocation: Owners 60% of Pay, All Others 3% of Pay

Profit Sharing: Owners: 0% of Pay, All Others 6.5% of Pay

No allocation or Floor Offset Safe Harbors are employed

Both plans are aggregated for coverage and non-discrimination testing which passes using general testing (assume it passes at the razor's edge).

Is it allowable to use aggregated testing in such a Floor Offset arrangement? In essense you are testing the employees as if they are recieving 9.5% when in reality all they can receive is 6.5%.

Is it specifically allowed or specifically disallowed? Or is it gray?

[SoCalActuary]

The combo testing should be allowed. But you likely have a 401(a)(26) failure.

[Dougsbpc]

Agree with SoCal as it is unlikely that employees will accrue a meaningful benefit of at least .5% of pay per year of participation.

[rcline46]

With the owner at 60% of pay, you need a gateway of at least 7.5% of pay for NCEs.

Even more fundamental - since you claim this is a floor/offset, then the DB benefit is reduced by the equivalent benefit of the contribution in the DC plan. Note that since it is a CBDB plan, the contribution rate in the CB must be converted to a benefit which is then offset for funding. When you combine the plans for testing you cannot use the CB 3% benefit since it will not be provided IN ADDITION TO the 6.5% benefit in the DC plan, you must use the offset benefit.

I would think you not only have 401(a)(26) problems, you also have 401(a)(4) problems.

[Guest facade]

Let us assume that sufficient employees are younger to allow the 401(a)(26) test to pass at 3%. I'm not really concerned about the CB percentage, it can be whatever is necessary to pass all testing. I'm seeking some confirmation that its ok to include what amounts to a phantom benefit in an aggregated general test.

So we have 2 votes seeming to say that's its fine and one vote saying no.

Can anyone quote anything (Regs, rulings, etc.) that specifically deals with this?

[AndyH]

No, it is not ok.

You test what they actually get under the general test. (I don't think everybody was addressing that particular question).

[SoCalActuary]

You are looking at an offset formula that does not provide a uniform basic benefit.

The PS plan does not have a uniform formula, so your net benefit in the DB plan must be tested under 401(a)(26).

Therefore, you really have a 60% CB formula for one person and a 6.5% PS for all others. The others have no net DB benefit, and you don't meet the a26 exception.

If you are not covered by PBGC, then you are dealing with the 404(a)(7) deduction issues as well.

Sorry, but I think you fail at least one test here.

[Guest facade]

No, it is not ok.

You test what they actually get under the general test. (I don't think everybody was addressing that particular question).

The Floor Offset Safe Harbor allows the defined benefit plan to be generally tested without taking into account the offset. So I would presume that the general test can be performed the same outside of the Floor Offset Safe Harbor.

"Alternatively, if the defined contribution plan is the safe harbor plan, the defined benefit plan must satisfy either one of the safe harbor methods in Treasury Regulations Section 1.401(a)(4)-3(b) or satisfy a general test under Treasury Regulations Section 1.401(a)(4)-3© without taking into account the offset, and the defined contribution plan must satisfy the uniform allocation safe harbor under Treasury Regulations Section 1.401(a)(4)-2(b)(2)."

[rcline46]

What you said is true, but you indicated the DB plan would NOT satisfy the general test ON ITS OWN. It is necessary to combine it with the DC plan to pass testing. That throws the exceptions you quote out of the window.

[Guest facade]

You are looking at an offset formula that does not provide a uniform basic benefit.

The PS plan does not have a uniform formula, so your net benefit in the DB plan must be tested under 401(a)(26).

Therefore, you really have a 60% CB formula for one person and a 6.5% PS for all others. The others have no net DB benefit, and you don't meet the a26 exception.

If you are not covered by PBGC, then you are dealing with the 404(a)(7) deduction issues as well.

Sorry, but I think you fail at least one test here.

So it all comes down to what is considered "a reasonable and uniform basis". Does it simply mean you must be benefiting that same participants? Or is is expanded to mean the participants must also be receiving the same benefit percentages?

"With regard to a floor-offset arrangement, the offset may be disregarded if both plans are maintained by the same employer, the defined contribution plan is used to offset or reduce benefits under the defined benefit plan, there is uniformity between the participation in the two plans, and the contributions used to offset the benefits are not used to offset any other plan. [Treas. Reg. § 1.401(a)(26)-5(a)(2)]"

a)Employees benefiting under a plan

(1)In general.—

Except as provided in paragraph (a)(2) of this section, an employee is treated as benefiting under a plan for a plan year if and only if, for that plan year, the employee would be treated as benefiting under the provisions of §1.410(b)-3(a), without regard to §1.410(b)-3(a)(iv).

(2)Sequential or concurrent benefit offset arrangements

(i)In general.—

An employee is treated as accruing a benefit under a plan that includes an offset or reduction of benefits that satisfies either paragraph (a)(2)(ii) or (a)(2)(iii) of this section if either the employee accrues a benefit under the plan for the year, or the employee would have accrued a benefit if the offset or reduction portion of the benefit formula were disregarded. In addition, an employee is treated as accruing a meaningful benefit for purposes of prior benefit structure testing under §1.401(a)(26)-3 if the employee would have accrued a meaningful benefit if the offset or reduction portion of the benefit formula were disregarded.

(ii)Offset by sequential or grandfathered benefits.—

An offset or reduction of benefits under a defined benefit plan satisfies this paragraph (a)(2) if the benefit formula provides that an employee will not accrue additional benefits under the current portion of the benefit formula until the employee has accrued, under such portion, a benefit in excess of such employee's benefit under one or more formulas in effect for prior years that are based wholly on prior years of service. The prior benefit may have accrued under the same or a separate plan, may be provided under the same or a separate plan and may relate to service with the same or previous employers. Benefits will not fail to be treated as based wholly on prior years if they are based, directly or indirectly, on compensation earned after such prior years (including compensation earned in the current year), if they are adjusted to reflect increases in the section 415 limitations, or if they are increased to provide an ad hoc cost of living adjustment designed to adjust, in whole or in part, for inflation. Furthermore, benefits do not fail to be treated as based wholly on prior years merely because the benefits (e.g., early retirement benefits) are subject to an age or years-of-service condition and, in applying the condition or conditions, the current and prior years are taken into account.

(iii)Concurrent benefit offset arrangements

(A)General rule.—

An offset or reduction of benefits under a defined benefit plan satisfies the requirements of this paragraph (a)(2)(iii) if the benefit formula provides a benefit that is offset or reduced by contributions or benefits under another plan that is maintained by the same employer and the following additional requirements are met:

(1) The contributions or benefits under a plan that are used to offset or reduce the benefits under the positive portion of the formula being tested accrued under such other plan;

(2) The employees who benefit under the formula being tested also benefit under the other plan on a reasonable and uniform basis; and

(3) The contributions or benefits under the plan that are used to offset or reduce the benefits under the formula being tested are not used to offset or reduce that employee's benefits under any other plan or any other formula.

[Guest facade]

What you said is true, but you indicated the DB plan would NOT satisfy the general test ON ITS OWN. It is necessary to combine it with the DC plan to pass testing. That throws the exceptions you quote out of the window.

Agreed, however I am not saying that I wish to use the Safe Harbor, merely that if you are allowed to include the offset benefits when generally testing under the floor offset safe harbor. Then you should be able to include the offset benefits when generally testing under a non-safe harbor floor offset design.

[Guest facade]

A search for reasonable and unform led me to this Discussion which seems to agree that the aggregated design is allowed. This leads to another question though. Should the DC Gateway be fixed at 7.5% or can you include the offset DB amounts indetermining the gateway percentage?

[SoCalActuary]

A search for reasonable and unform led me to this Discussion which seems to agree that the aggregated design is allowed. This leads to another question though. Should the DC Gateway be fixed at 7.5% or can you include the offset DB amounts indetermining the gateway percentage?

Include them. Their value is ZERO. Now, you are back where the discussion was before.