DB DC Combo - Gateway

[John Feldt ERPA CPC QPA]

DB plan covers 3 HCEs

DC plan covers these same 3 HCEs plus 3 NHCEs. No other employees.

401(a)(26) passes (3/6 > 40%)

410(b) passes - combined plan coverage passed the ABPT.

Assuming the ebars are over 35% for the HCEs, is the 7.5% DB/DC gateway allocation required for the NHCEs even though they are only in the DC plan?

[QNPG]

DB plan covers 3 HCEs

DC plan covers these same 3 HCEs plus 3 NHCEs. No other employees.

401(a)(26) passes (3/6 > 40%)

410(b) passes - combined plan coverage passed the ABPT.

Assuming the ebars are over 35% for the HCEs, is the 7.5% DB/DC gateway allocation required for the NHCEs even though they are only in the DC plan?

Does this help:

The following examples, taken from the regulations, illustrate the special gateway test and the alternatives.

5.e.1) Example - DB plan does not cover any NHCs. An employer maintains two plans, one DB plan and one DC plan. The DB plan covers only HCEs. The DC plan covers only NHCs. Since the DB plan cannot satisfy coverage on its own, because it covers only HCEs, it must be aggregated with the DC plan in order to pass coverage and nondiscrimination testing. The aggregated plans constitute a DB/DC plan for coverage and nondiscrimination testing purposes. Since none of the NHCs participate in the DB plan, there is no way for the DB/DC plan to satisfy either the “primarily defined benefit” test or the “broadly available” test. Therefore, the plan will have to satisfy the special gateway test or it will not be able to be tested on a benefits basis to show compliance with §401(a)(4).

5.c. What is the special gateway test for a DB/DC plan? The special gateway test referred to in 5.a. above, which is prescribed by Treas. Reg. §1.401(a)(4)-9(b)(2)(v)(D), requires that each NHC's combined normal allocation rate (i.e., the sum of the NHC's allocation rate under the DC plan and the NHC's equivalent allocation rate under the DB plan) not be less than a minimum percentage, based on the highest HCE rate. The highest HCE rate is the highest combined normal allocation rate applicable for any HCE who benefits under the DB/DC plan. If the highest HCE rate is 15% or less, then the minimum combined normal allocation rate for the NHCs is one-third of that highest HCE rate. If the highest HCE rate is more than 15% but not more than 25%, then the minimum combined normal allocation rate for the NHCs is 5%. If the highest HCE rate is more than 25%, then the minimum combined normal allocation rate for the NHCs is 5% plus 1% point for each five percentage points (or portion thereof) that the highest HCE combined allocation rate exceeds 25% (e.g., 6% if the highest HCE rate is more than 25% but not more 30%). Like the regular gateway contribution test that applies to a cross-tested defined contribution plan, the combined normal allocation rate may be calculated using any definition of compensation that satisfies IRC §414(s).

5.c.1) 7½% safe harbor alternative. In an important change in the final regulations, a safe harbor alternative deems the special gateway as satisfied if the combined allocation rate for all NHCs is no less than 7-1/2% of section 415 compensation, even if the special gateway would otherwise require a higher allocation rate. (In other words, the 5% test under the regular gateway contribution test is increased to a 7-1/2% test.)

5.a.2) Exception for safe harbor floor-offset arrangement. If the DB/DC plan consists of a floor-offset arrangement, it is not subject to the special gateway test if it is a safe harbor floor-offset arrangement, as described in Treas. Reg. §1.401(a)(4)-8(d) (as described in Part B.2. of Section VIII of this chapter), and the preamble to the final regulations confirms this as well.

[John Feldt ERPA CPC QPA]

Spot on. Thanks Querk!

[QNPG]

Sure!

I do a lot of research for my company so I knew where to look.

[retbenser]

Sure!

I do a lot of research for my company so I knew where to look.

So is the answer a Yes or a NO?

.

[John Feldt ERPA CPC QPA]

Yes, a DB/DC gateway is needed as described in Treas. Reg. §1.401(a)(4)-9(b)(2)(v)(D).