Combo Profit Sharing & Cash Balance Plan Testing - Definition of Compensation

[pixiebear]

We have a Cash Balance Plan and a Profit Sharing Plan that we are combining for testing. The Profit Sharing Plan defines Compensation as Compensation from date of Participation. We have several employees who became eligible 7/1/2021 so we would use their Compensation from 7/1/2021 to 12/31/2021 for allocation. The Cash Balance Plan defines Compensation as full year compensation. Can we use the two different definitions of Compensation for the 401(a)(4) testing? Is this allowed or do we have to use full year Compensation for testing?

[C. B. Zeller]

While a plan must define compensation to be used for allocation (DC) or benefit accrual (DB) purposes, in my experience it is unusual to see a plan that explicitly requires (or prohibits) a particular definition of compensation to be used for satisfying amounts testing under 401(a)(4). Does your plan have a provision that limits the choice of testing compensation?

[pixiebear]

No, there is no provision limiting the choice of testing compensation however when using Compensation as a participant for allocation purposes and full year compensation for testing, it fails the testing so it doesn't make sense to use the part year compensation for the allocation.

[C. B. Zeller]

You will generally get better results when testing using pay as a participant, assuming that the mid-year entrants are (predominantly) NHCEs. This is fine, even if benefits are based on full year compensation, as long as it is not abusive (for example, a participant who enters the plan on December 30 gets an allocation based on full year compensation which is tested on pay as a participant, resulting in an absurdly large allocation rate).

[Jakyasar]

In case of a combo plan where different compensation definitions are used for contributions, isn't the combo testing done using the highest compensation? Curious.

[Bri]

It's going to depend if the document defines it.  Assuming we get to use "any definition satisfying 414(s)" (or words to that effect), then it's Administrator's choice whether to use "only as a participant" versus "full year."

That being said, I think if you have different ENTRY dates for the two plans.....well, since the normal coverage/nondiscrim rules say to use the lowest eligibility rule between the plans, I'd probably use the pay starting from the earlier of the dates. 

But that's because I don't bother to calculate the separate plans' portions to the overall test under their own definition of pay and then add the resulting EBARs for each participant.  (Does anyone do it that way, as in.....can you?)

[C. B. Zeller]

28 minutes ago, Jakyasar said:

In case of a combo plan where different compensation definitions are used for contributions, isn't the combo testing done using the highest compensation? Curious.

I'm not aware of any such requirement in the 401(a)(4) regs. What the regs say is that you have to use plan year compensation (if not using average annual compensation), and plan year compensation means 414(s) compensation measured over either the plan year, or over the period of participation occurring during the plan year (or a couple of other options).

[C. B. Zeller]

6 minutes ago, Bri said:

But that's because I don't bother to calculate the separate plans' portions to the overall test under their own definition of pay and then add the resulting EBARs for each participant.  (Does anyone do it that way, as in.....can you?)

I would avoid designing a plan this way, but I think you could read the regs to support that approach. 1.401(a)(4)-9(b)(2)(ii)(B)

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(B) Aggregate accrual rates. An employee's aggregate normal and most valuable accrual rates are determined by treating all defined contribution plans that are part of the DB/DC plan as a single plan, and all defined benefit plans that are part of the DB/DC plan as a separate single plan; and determining an equivalent accrual rate and normal and most valuable accrual rates for the employee under each plan under §§1.401(a)(4)-8(b)(2) and 1.401(a)(4)-3(d), respectively. The employee's aggregate normal accrual rate is the sum of the employee's equivalent accrual rate and the normal accrual rate determined in this manner, and the employee's aggregate most valuable accrual rate is the sum of the employee's equivalent accrual rate and most valuable accrual rate determined in this manner.

On the other hand, paragraph (b)(2)(iv)(A) suggests maybe you can't:

Quote

(iv) Consistency rule—(A) General rule. Aggregate normal and most valuable allocation rates and aggregate normal and most valuable accrual rates must be determined in a consistent manner for all employees for the plan year. Thus, for example, the same measurement periods and interest rates must be used, and any available options must be applied consistently, if at all, for the entire DB/DC plan. Consequently, options that are not permitted to be used under §1.401(a)(4)-8 in cross-testing a defined contribution plan or a defined benefit plan (such as measurement periods that include future periods, non-standard interest rates, the option to disregard compensation adjustments described in §1.401(a)(4)-13(d), or the option to disregard plan provisions providing for actuarial increases after normal retirement age under §1.401(a)(4)-3(f)(3)) may not be used in testing a DB/DC plan on either a benefits or contributions basis, because their use would inevitably result in inconsistent determinations under the defined contribution and defined benefit portions of the plan.

Probably safest to use the earlier of the two entry dates for measuring pay as a participant, and using that for all purposes, if you are going to do this.

[Nate S]

On 4/18/2022 at 12:23 PM, pixiebear said:

We have several employees who became eligible 7/1/2021 so we would use their Compensation from 7/1/2021 to 12/31/2021 for allocation. The Cash Balance Plan defines Compensation as full year compensation. Can we use the two different definitions of Compensation for the 401(a)(4) testing? Is this allowed or do we have to use full year Compensation for testing?

Do the CB participants have the same 7/1 entry date?  If so, then your participating compensation is 414(s) safe harbor and you can use that for the testing regardless of the basis of the allocation compensation.  And if the CB entry dates are retroactive back to 1/1, an alternate definition of entry date compensation would be as of the date eligibility was actually satisfied, ie hired 3/26/2020, one year satisfied as of 3/25/21, participating compensation is 3/26/21 - 12/31/21.

20 hours ago, C. B. Zeller said:

On the other hand, paragraph (b)(2)(iv)(A) suggests maybe you can't:

Don't forget the caveat to the consistency precept of "unless you have to" .😇  Such as for one plan using calendar year compensation aggregated with one using fiscal year compensation. So you could force the issue by writing the separate plan calcs into the "administrative procedures" of the documents.