DB/DC Combo Testing Question

[AndyH]

Doing a 410(b) test using the Average Benefit Test.

1.410(b)-(5)(d)(7) says that under certain conditions (which do apply to my situation) the Most Valuable Accrual/Allocation Rate must be substituted for the Normal Accrual/Allocation rate if the average early retirement reduction during the last 5 years prior to NRA is less than 4%.

In this situation, the reduction in the last 5 years is less than 4% for employees who separate from service on or after age 55. It is more than 5% for employees who separate prior to age 55.

The average participant age is about 50.

Must the MVAR be substituted for the NAR?

Question 2: Should the MVAR reflect the subsidy for someone who has not attained age 50?

[QNPG]

Doing a 410(b) test using the Average Benefit Test.

1.410(b)-(5)(d)(7) says that in under certain conditions (which do apply to my situation) the Most Valuable Accrual/Allocation Rate must be substituted for the Normal Accrual/Allocation rate if the average early retirement reduction during the last 5 years prior to NRA is less than 4%.

In this situation, the reduction in the last 5 years is less than 4% for employees who separate from service on or after age 55. It is more than 5% for employees who separate prior to age 55.

The average participant age is about 50.

Must the MVAR be substituted for the NAR?

Question 2: Should the MVAR reflect the subsidy for someone who has not attained age 50?

AndyH, at the risk of asking a silly question... does your situation meet the exception mentioned in 1.410(b)-(5)(d)(7)(ii)?

"(ii) Exception. Paragraph (d)(7)(i) of this section does not apply if early retirement benefits with average actuarial reductions described in that paragraph are currently available, within the meaning of §1.401(a)(4)–4(b), under plans in the testing group to a percentage of nonhighly compensated employees that is at least 70 percent of the percentage of highly compensated employees to whom these benefits are currently available."

[Belgarath]

Andy, IMHO, I'd say the answer to both your questions is yes. But I'm not an actuary, so my answer is not based on anything practical whatsoever, just my reading of the regs. Ergo, the accuracy of my answer is probably equivalent to a BoSox player trade manual entitled, "How to improve your team by trading away young talent."

[QNPG]

Doing a 410(b) test using the Average Benefit Test.

1.410(b)-(5)(d)(7) says that in under certain conditions (which do apply to my situation) the Most Valuable Accrual/Allocation Rate must be substituted for the Normal Accrual/Allocation rate if the average early retirement reduction during the last 5 years prior to NRA is less than 4%.

In this situation, the reduction in the last 5 years is less than 4% for employees who separate from service on or after age 55. It is more than 5% for employees who separate prior to age 55.

The average participant age is about 50.

Must the MVAR be substituted for the NAR?

Question 2: Should the MVAR reflect the subsidy for someone who has not attained age 50?

I'm no expert either but after reading the Regs, I am of the opinion that if any of the employees involved is an HCE, then unless you satisfy the exception below, my answer would be yes to question #1.

(ii) Exception. Paragraph (d)(7)(i) of this section does not apply if early retirement benefits with average actuarial reductions described in that paragraph are currently available, within the meaning of §1.401(a)(4)–4(b), under plans in the testing group to a percentage of nonhighly compensated employees that is at least 70 percent of the percentage of highly compensated employees to whom these benefits are currently available.

I enjoy the research but this was a tough one!

[AndyH]

AndyH, at the risk of asking a silly question... does your situation meet the exception mentioned in 1.410(b)-(5)(d)(7)(ii)?

"(ii) Exception. Paragraph (d)(7)(i) of this section does not apply if early retirement benefits with average actuarial reductions described in that paragraph are currently available, within the meaning of §1.401(a)(4)–4(b), under plans in the testing group to a percentage of nonhighly compensated employees that is at least 70 percent of the percentage of highly compensated employees to whom these benefits are currently available."

No, that is what I meant by "(which do apply to my situation)". The percentage for purposes of this exception is well below 70%. This is why my situation is not common - there needs to be both heavy early retirement subsidies restricted by age and class exclusions.

[AndyH]

Andy, IMHO, I'd say the answer to both your questions is yes. But I'm not an actuary, so my answer is not based on anything practical whatsoever, just my reading of the regs. Ergo, the accuracy of my answer is probably equivalent to a BoSox player trade manual entitled, "How to improve your team by trading away young talent."

Thanks. Your comments on these questions always evidence a much deeper understanding than you want to admit! I'm suspecting your real name is Bill James.

[QNPG]

AndyH, at the risk of asking a silly question... does your situation meet the exception mentioned in 1.410(b)-(5)(d)(7)(ii)?

"(ii) Exception. Paragraph (d)(7)(i) of this section does not apply if early retirement benefits with average actuarial reductions described in that paragraph are currently available, within the meaning of §1.401(a)(4)–4(b), under plans in the testing group to a percentage of nonhighly compensated employees that is at least 70 percent of the percentage of highly compensated employees to whom these benefits are currently available."

No, that is what I meant by "(which does not apply to my situation)". The percentage for purposes of this exception is well below 70%. This is why my situation is not common - there needs to be both heavy early retirement subsidies restricted by age and class exclusions.

I think you wrote "which does apply to my situation". Either way, its a difficult topic. Sorry I couldn't be of some help.

[AndyH]

AndyH, at the risk of asking a silly question... does your situation meet the exception mentioned in 1.410(b)-(5)(d)(7)(ii)?

"(ii) Exception. Paragraph (d)(7)(i) of this section does not apply if early retirement benefits with average actuarial reductions described in that paragraph are currently available, within the meaning of §1.401(a)(4)–4(b), under plans in the testing group to a percentage of nonhighly compensated employees that is at least 70 percent of the percentage of highly compensated employees to whom these benefits are currently available."

No, that is what I meant by "(which does not apply to my situation)". The percentage for purposes of this exception is well below 70%. This is why my situation is not common - there needs to be both heavy early retirement subsidies restricted by age and class exclusions.

I think you wrote "which does apply to my situation". Either way, its a difficult topic. Sorry I couldn't be of some help.

Yes, sorry for the confusion, I just noticed that myself and corrected it. Thanks for your comments. It is a difficult question. I don't think a lot of people know about this rule.

[QNPG]

AndyH, at the risk of asking a silly question... does your situation meet the exception mentioned in 1.410(b)-(5)(d)(7)(ii)?

"(ii) Exception. Paragraph (d)(7)(i) of this section does not apply if early retirement benefits with average actuarial reductions described in that paragraph are currently available, within the meaning of §1.401(a)(4)–4(b), under plans in the testing group to a percentage of nonhighly compensated employees that is at least 70 percent of the percentage of highly compensated employees to whom these benefits are currently available."

No, that is what I meant by "(which does not apply to my situation)". The percentage for purposes of this exception is well below 70%. This is why my situation is not common - there needs to be both heavy early retirement subsidies restricted by age and class exclusions.

I think you wrote "which does apply to my situation". Either way, its a difficult topic. Sorry I couldn't be of some help.

Yes, sorry for the confusion, I just noticed that myself and corrected it. Thanks for your comments. It is a difficult question. I don't think a lot of people know about this rule.

I was told once to never give up...

This may help you: http://www.irs.gov/pub/irs-utl/d9240.pdf

Page 32 and 33, particularly.

[AndyH]

Yeah, I looked at that earlier, but don't see anything really different or clearer than what the regulation says. Neither exactly addresses this situation.