Prohibited Payments and Plan Aggregation

[Guest Aaron Pierce]

I am trying to puzzle out the application of the restriction on prohibited payments under Code Section 436 to plans that are aggregated for purposes of satisfying minimum coverage (and thus 401(a)(4) as well). Here are the facts:

To satisfy minimum coverage, a defined benefit plan is permissively aggregated with a defined contribution plan. The DB plan's AFTAP will fall below 80% and therefore the limitations on prohibited benefits will apply. Because the DB and DC plans are aggregated for 410(b) purposes, the plans are aggregated for 401(a)(4) purposes, including the nondiscriminatory availability of benefis, rights and feature ("BRF") rules of 1.401(a)(4)-4. Take it as a given that the BRF test could not be satisfied if only the DC plan offerred the lump sum.

Do we have a 401(a)(4) problem regarding availability of BRFs - namely, the lump sum option currently offerred under both plans - if lump sums are restricted in the DB plan, but not in the DC plan? To say it another way, if lump sums are required to be restricted in the DB plan due Code Section 436, must they also be restricted in the DC plan as a result of the aggregation?

Clearly, we have 411(d)(6) relief for the restriction of the lump sums in the DB plan. But, because Code Section 436 by its terms as no application to a DC plan, I don't think we get any relief for an amendment to restrict the lump sums in the DC plan. Thus, while an amendment of the DC plan to restrict the lump sum in the DC plan might avoid a BRF problem, it would seem to create a 411(d)(6) problem in the DC plan?

Can we disregard the 436 restrictions on the lump sum under the DB plan when determining compliance with the BRF rules for the aggregated plans and continue to allow unrestricted lump sums in the DC plan?

Any thoughts or suggestions would be appreciated.

[SoCalActuary]

I suspect you are over-reaching here. The DB plan can offer lump sums once the funding is corrected within the next seven years.

But it is possible that some participant's lawyer could make this an issue.