Cash Balance & New Comp

[Logan401]

A client has had a new Comparability PS plan for 10 years, and the groups are Owners & All Other participants.

Client started a new CB plan in 2012.

1st Question: Can the CB contributions be included towards the minimum gateway contribution?

2nd Question: CB administrator sends his report saying that the All Other participants need to get more PS to make CB plan work. The additional PS in his report is not pro rata, as each participant in this group has different %s. When adding the CB contribution though, they do become even. I think that the actual PS portion must be pro rata amongst the EEs in this group for this to be okay. Do you share the same belief? We can amend for next year to make each participant in their own group, but I would like to know what can be done for 2012.

Thank you!

[John Feldt ERPA CPC QPA]

1. The cash balance credits themselves cannot directly be counted dollar for dollar as part of the gateway (they aren't actually contributions, they're just hypothetical notional accounts written on paper). However, see Treasury Regulation 1.401(a)(4)-9(b)(2)(v)(D)(3). This allows the average actuarial equivalent value of the benefit accruals in the cash balance plan for the NHCEs who benefit under both plans to be considered as satisfying a portion of the gateway. Caution: the actuarial value is not equal to value of the account balance credits.

2. The terms of the plan document must be followed, so if it requires prorata PS for a group, then you are correct. I agree that each participant should probably be placed into their own individual allocation group, assuming passing 410(b), coverage, is not an issue. That said, perhaps you could do this:

Step #1. have the employer contribute and then allocate a pro-rata PS amount - an amount that you know is the minimum that any NHCE participant will receive as PS.

Step #2: Run the combined plan 401(a)(4) test - uh oh, it fails.

Step #3: Adopt a corrective amendment under 1.401(a)(4)-11(g) to correct the 2012 failure. Under the amendment, language will be needed that provides various additional PS to the various NHCEs as needed in order to pass testing.

Step#4: Allocate the additional PS as specified according to that amendment. Just a thought.

[AndyH]

1. The cash balance credits themselves cannot directly be counted dollar for dollar as part of the gateway (they aren't actually contributions, they're just hypothetical notional accounts written on paper). However, see Treasury Regulation 1.401(a)(4)-9(b)(2)(v)(D)(3). This allows the average actuarial equivalent value of the benefit accruals in the cash balance plan for the NHCEs who benefit under both plans to be considered as satisfying a portion of the gateway. Caution: the actuarial value is not equal to value of the account balance credits.

2. The terms of the plan document must be followed, so if it requires prorata PS for a group, then you are correct. I agree that each participant should probably be placed into their own individual allocation group, assuming passing 410(b), coverage, is not an issue. That said, perhaps you could do this:

Step #1. have the employer contribute and then allocate a pro-rata PS amount - an amount that you know is the minimum that any NHCE participant will receive as PS.

Step #2: Run the combined plan 401(a)(4) test - uh oh, it fails.

Step #3: Adopt a corrective amendment under 1.401(a)(4)-11(g) to correct the 2012 failure. Under the amendment, language will be needed that provides various additional PS to the various NHCEs as needed in order to pass testing.

Step#4: Allocate the additional PS as specified according to that amendment. Just a thought.

With respect to #1, John's averaging method comment is true but it is an option not the only approach. The allocation values can also be done on an individual basis instead of an average basis.

And either way you will find that If you project forward, at say a 5% CB earnings rate and discount back using a 7.5% to 8.5% testing rate you will get an "allocation rate" for gateway and testing purposes that is much less than the original CB allocation.

[John Feldt ERPA CPC QPA]

With respect to #1, John's averaging method comment is true but it is an option not the only approach. The allocation values can also be done on an individual basis instead of an average basis.

Correct, I keep thinking of the usual employer desire to have a somewhat uniform PS allocation. I've seen the individual method used less often.

[Logan401]

We administrate a New Comparability plan that also has an outside CB plan.

Under the normal conditions of the New Comparability plan, if you are not employed on the last day of the plan year, you are not eligible to receive a PS allocation.

The plan is not safe harbor, and no employees received a nonelective contribution.

if the terminated employees received a CB contribution credit, must they also receive the minimum gateway contribution in the PS plan?

[AndyH]

This is a bit vague. Maybe. Probably.

Maybe not if the participants are under 21 or have less than 1 year of service. Maybe not if the plan can be tested on a contributions basis. Maybe not if the annuity value of the CB satisfies the gateway requirement. Maybe not if the plans can be considered primarily DB in nature. Need many more details.

[Tom Poje]

the rule of thumb is any NHCE who is considered benefiting under the plan must receive the gateway. (Aside from the items AndyH lists above)

you are most likely aggregating the plans, so for coverage, do you consider the person to be benefiting for nonelective purposes?

In addition,

most such plans are top heavy anyway, and the terminated person who received the cash balance probably had 1000 hours. therefore he has to receive a top heavy in some way shape or form.

[AndyH]

Almost certainly not unlikely.

[John Feldt ERPA CPC QPA]

Almost certainly not unlikely.

I do not disagree.