Minimum Gateway

[Dougsbpc]

Suppose a traditional DB plan provides nhces a benefit of .5% of average salary. The employer also sponsors a 401(k) plan.

Could the 401(k) plan provide nhces with a 6.5% mandatory employer contribution in the 401(k) plan and meet the minimum gateway?

It seems that a DB benefit is generally worth more than twice a DC contribution. The logic being a 5% top heavy minimum in a DC plan is equivalent to a 2% top heavy minimum benefit in a DB plan.

Thanks

[Effen]

I am not sure exactly what you are asking, but you cannot just add the .5% db accrual to the 6.5% dc contribution and say it is worth 7% gateway contribution.

You need to convert the .5% db into a dc like contribution before adding it to the 6.5% dc contribution to see if it satisfies the gateway. There is also averaging that can be used that is often helpful.

[AndyH]

And the present value of the db benefit for gateway purposes must use the testing assumptions, which include the use of an interest rate between 7.5% and 8.50%, i.e. a "standard" interest rate.

[Rball4]

level of gateway needed also depends on max HCE's benefit.

[ac]

If the participant's average annual compensation is $3,000 per month, his age is 43, normal retirement age is 65 and testing assumptions are 8.5% pre, 8.5% post and 71 GAM-Male, the calculation of the Equivalent Contribution Rate is:

.005 x $3,000 x 94.79854 x (1/1.085^22) / "Plan Compensation for Plan Year" = Equivalent Contribution Rate

In calculating the Equivalent Contribution Rate, is it possible to use 3-year average compensation for the "Plan Compensation for Plan Year". Since average annual compensation is based on a 3-year average, it seems you should be able to.

[david rigby]

It seems that a DB benefit is generally worth more than twice a DC contribution. The logic being a 5% top heavy minimum in a DC plan is equivalent to a 2% top heavy minimum benefit in a DB plan.

I'm not comfortable with that generalization.

[AndyH]

If the participant's average annual compensation is $3,000 per month, his age is 43, normal retirement age is 65 and testing assumptions are 8.5% pre, 8.5% post and 71 GAM-Male, the calculation of the Equivalent Contribution Rate is:

.005 x $3,000 x 94.79854 x (1/1.085^22) / "Plan Compensation for Plan Year" = Equivalent Contribution Rate

In calculating the Equivalent Contribution Rate, is it possible to use 3-year average compensation for the "Plan Compensation for Plan Year". Since average annual compensation is based on a 3-year average, it seems you should be able to.

I'm not following the question. For what purpose? Are you talking about the gateway? the .5% for 401(a)(26)?

Oh, maybe the question is about "Plan Year Compensation"? If so, that is specifically defined as current year. Definition is in 1.401(a)(4)-12