410(b) / 401(a)(4) question

[Effen]

Let’s say I have a plan sponsor with 3 divisions and 250 employees.  At one time they had a DB plan for the entire company, but the plan was closed several years ago.  The plan now contains 52 active employees and is expected to drop below 50 at which point it will fail 401(a)(26).  The plan is a safe harbor 1% of pay/yos.  There are other HCEs outside the plan and the plan and the plan satisfies 410(b) using the average benefits test.  We don’t need to do 401(a)(4) rate groups because the plan is a safe harbor.  I think we are good so far.

 

In an effort to avoid freezing the plan (they just feel obligated to provide the promised benefit), they are contemplating bringing in additional participants.  They are thinking about adding a cash balance benefit for the salaried employees.   This would add another 40 people to the plan.   Although this would now include all of the HCEs, it would cover enough of the NHCEs and would still satisfy 410(b) using the average benefits test.  My thought is to structure the cash balance formula in such a way that it would satisfy the cash balance safe harbor.

 

If I have 2 safe harbor formulas inside the same plan, can I continue to avoid the 401(a)(4) rate group testing?  In other words, can I disaggregate the plans and claim they are both safe harbors, even though they are inside the same plan?  I know I also need to think about rights & features, but I want to get through the testing issues first.  Would each component plan need to satisfy 410(b) on its own in order to call them both safe harbors under (a)(4)?

[My 2 cents]

Based on my recollection of the rules, I don't think that a plan with two separate groups, each of which has a single "safe harbor" formula applicable to only one of the two groups (i.e., the plan covers groups A and B, A participants get formula 1 and B participants get formula 2) is entitled to be treated as providing benefits under a safe harbor.  To do that, all plan participants must be accruing benefits under the same benefit structure, unless Group A passes 410(b) on its own and Group B passes 410(b) on its own.  Granted that the plan passes 410(b) when looking at both A and B, you would only get safe harbor treatment for Group A by itself and for Group B by itself if A by itself passed 410(b) and B by itself passed 410(b).  If B contains all of the HCEs and only some of the non-HCEs, that might not be possible.

[Effen]

Thank you, that was helpful.  Let me try to simplify my question.

Plan A satisfies 410(b) and contains a safe harbor formula

Plan B satisfies 410(b) and contains a safe harbor formula

Some active employees are not covered by either Plan A or Plan B

No active employee benefits in both Plan A and Plan B.

If the plans are separate, Plan A will soon fail 401(a)(26).

If I combine Plan A and Plan B into one plan in order to satisfy 401(a)(26), do I need to do general testing under 401(a)(4) or can I just say they are safe harbors and move on.

[My 2 cents]

As noted, for 401(a)(4) purposes, it is my understanding that the plan's benefits are treated as safe harbor benefits only if (a) the formula(s) are all safe harbor formulas and (b) the plan provisions apply on a uniform basis (including benefits, rights, and features).  A plan that provides benefits that are not uniform may still be able to pass 401(a)(4), but it would not be enough to wave one's hands over the plan, say "safe harbor" and be done with it.

[Mike Preston]

Huh? Why isn't this just a simple case of restructuring?

[My 2 cents]

OK, I took a further look at the 401(a)(4) regulations concerning restructuring, and I agree that this does not appear to fall under the exceptions.  Perhaps each piece, separately passing 410(b), can be tested based on having a uniform safe harbor formula within the piece.  The salaried-only piece really and truly passes 410(b) on a stand-alone basis?

[CuseFan]

How many active HCEs are left in the DBP? It may make more sense to amend DB do that HCEs are no longer eligible and, depending on the situation, try to make them whole via enhanced profit sharing or NQDC or a combination thereof.

[Mike Preston]

I'm just focusing on the original question.  As I said, it is a simple case of restructuring.  Keep in mind that to use the ABT to satisfy 410(b) each separate plan population must be a reasonable classification.  It sounds like it is, but you need to make sure.

[Effen]

Yes, thank you.  I recognize there are other ways to handle this and we are discussing various options.  I was really just focusing on this one particular option.  This is a traditional retirement benefit and the salaried group contains enough NHCEs to get through 410(b) using the ABT.  I was really just trying to avoid the extra work of doing an (a)(4) test, but now that I have looked at it, I think it would pass anyway.  But, if I don't need to do it, I would rather not.

Since the decision makers are the HCEs currently in the plan, freezing their benefit isn't all that appealing to them.  Since they are provide a 5% PS contribution, it seemed like a fairly seamless solution to just slide it into a cash balance formula and continue on.