401(a)(4) Question

[Guest raintrain19]

Sample DB Plan:

HCE 1: 10% avg comp per year of participation
HCE 2: 8% avg comp per year of participation
NHCEs: 0.5% avg comp per year of participation

The plan is cross-tested with a DC plan in order to pass testing.

Currently, the plan has about $500k assets and $350k liabilities.

Question: Does amending the plan to increase both HCE 1 and 2 to 15% and 12% respectively, but not giving an increase to the NHCEs in the DB Plan violate 401(a)(4) as it appears to discriminate in favor of the HCEs? It will require a larger contribution to the PS plan in order to pass testing.

It appears to me that it would, but if the NHCEs receive a larger contribution in the DC Plan, maybe that would be sufficient to say that the amendment did not discriminate in favor of the HCEs.

Any thoughts on this, or if you've run across this problem before, would be greatly appreciated. Thanks in advance.

[John Feldt ERPA CPC QPA]

As you mention, the plan is cross-tested with a DC plan in order to pass nondiscrimination testing. So, if the combined plan, when tested under 401(a)(4), passes with no additional DB accruals for the NHCEs, then 401(a)(4) is satisfied with regards to that amendment, even if the amendment is only changing one of the two plan's written formula. If you work on DB/DC combo-tested plans, you'll probably run across this quite frequently.

[Rball4]

Why amend HCE1 to 15%? That is higher than the 415 accrual, so the benefit will be limited anyway by 415.

[John Feldt ERPA CPC QPA]

15% of average pay does not necessarily exceed the 415 limit. Suppose the employee already has 10 years of service and the plan just started a couple of years ago.

[Rball4]

Original question mentioned 10% for plan participation years. So I was thinking of the 415 dollar limit, which only looks at participation years of service. But if the owner is not at the 401(a)(17) cap and formula is based on all years of service, then I can see 15%.