DC vs DB Coverage Testing

[justatester]

We are working on a DB ratio test. It is part of a very large controlled group that also has DC plans. We are not using snapshot testing. We are performing a ratio only test...so basically treating anyone as entitled to the accural as benefiting.

Question: If the DB accural does not have an hours or last day requirement, can I exclude those who termed with less than 500 hours?

[Tom Poje]

doesn't matter whether it is DB or DC

see 1.410(b)-6(f) certain terminating employees

(I) employee does NOT benefit during the plan year

(ii) employee is eligible to participate (Thus in a controlled group scenario you can't exclude those folks who aren't participants in the plan)

(iii)plan has a minimum period of service requirement or last day rule

(iv) participant fails to accrue because of (iii)

(v) employee terminates < 501 hours

(vi)basically says you could ignore all of the above and include all employees (this would be done if you HCEs in this group)

.............................

in addition, your statement "treating anyone entitled to the accrual as benefiting" might not pass the smell test.

years ago the IRS issued a memo indicating a participant should receive a minimal accrual of .5% to be considered having a meaningful benefit

in addition, since you indicated this is part of a large controlled group, hopefully the DB plan has at least 50 people benefiting otherwise the minimum participation test fails unless it meets one of the exceptions..

shultz db memo.pdf

[justatester]

I guess my question is more like...since my plan does not require 1000 hours or employed on the last day, can I exclude those who termed with less than 500 hours? For example, for the employer that does not participate in the DB plan, can I exclude all those who termed with less than 500 hours? Doesn't seem like you should be able to since it is not a requirement to receive the allocation. For those in the DB plan, they are getting a serviced based allocation even if they term on 1/3/12 for the 2012 plan year. So I am not sure why you would want to exclude those since they are benefiting.

[Tom Poje]

well, (ii) says you have to be a participant to be able to be excludable under these rules. If one has met the eligibility requirement but is not a participant you are out of luck based on those rules

item (iii) says the plan has to have a minimum service or last day rule which you don't have so I don't see how the rules would kick in.

as you indicated, generally such a person would be benefiting anyway and by item (i) you couldn't exclude them anyway even if you wanted to.

[John Feldt ERPA CPC QPA]

Perhaps implementing a 500 hour rule for accrual would help the plan going forward? Unless, of course, that then prevents enough terminate participants from helping the plan pass 401(a)(26).