DB/DC terminating during the year

Hi

DB/DC combo plan.

Termination of DB is a possibility (PBGC covered). Assume freeze date 7/31/2022 (small enough for 15 day rule) and assume termination date 9/30/2022. Distribution for the DB may or may not happen by 12/31/2022, possibly spills into 2023 as the rates seem to be getting better for 417e.

DC has 401k/SH/PS options.

What salaries should be used to determine the DC SH and PS portions as well as combo testing?

Thank you

As I understand it you need the same plan year to combo test the DB/DC so unless you are terminating the DC plan the same date as the DB plan I would think think you would want to make the termination December 31 if you want to combo test the DB/DC together. Maybe someone else has a different opinion.

And since this sounds like SH 401(k) unless you meet one of the exceptions, operating at economic loss, or qualified business transaction (generally selling the company) you'll lose the safe harbor status for the year of termination if it's not 12 months.

3 hours ago, Lou S. said:

As I understand it you need the same plan year to combo test the DB/DC so unless you are terminating the DC plan the same date as the DB plan I would think think you would want to make the termination December 31 if you want to combo test the DB/DC together. Maybe someone else has a different opinion.

And since this sounds like SH 401(k) unless you meet one of the exceptions, operating at economic loss, or qualified business transaction (generally selling the company) you'll lose the safe harbor status for the year of termination if it's not 12 months.

 

I agree with this.  But I recall that unless the DB plan termination amendment actually creates a short plan year instead of just a termination date where accruals cease and no new participants, the DB plan year is still a full plan year and the DB/DC can still be combo-tested.  

This is what I remember as well but the question is, when do you test the plans and what compensation do you use especially if the plan is frozen/terminated during the year (no short year issue, as you stated, simple termination does not create a short plan year, just a shorter valuation).

I mean, do all terminating DB plans have to wait till end of year to terminate when they are tested together with a DC plan?

There has to be a way to tackle this, I just cannot seem to find it.

Thanks

As far as I know, in 401(a)(4) testing, there is only one compensation... for the full plan year in this case.  So even if the DB plan accrual is based on partial year compensation, 401(a)(4) testing uses the full plan year compensation along with the DC plan.

So, you cannot terminate and finalize a combo plan termination until end of year?

DB is easy to terminate during the year as long as any corrective amendments for 410b and 401a4 are done under the DC plan?

You can terminate the DB at the time of your choosing; if for 7/31, the frozen accrued benefit is then calculated using document defined compensation & service through 7/31.  Your testing will occur at 12/31, using whatever full-year compensation you wish, as long as it passes 414.  The only caveat to that may be 401(a)(26), which could have to be done using the 7/31 compensation, or maybe you can avoid altogether if using a formula equal to or in excess of the default minimum provision (0.5% NAR per year of blah, blah, blah)  Keep in mind, your accrued benefit for 401(a)(4) is the actual calculated as of 7/31, you don't infer a full-year compensation equivalent benefit to test against; so termination years are usually easier to pass.  However, you do need to pay more attention to 404 if you previously maximized under the DB, but are switching to benefitting primarily in the DC, if you are funding more to bring the assets up to 417 minimums, you may be more restricted in the DC this year.  Just remind the client that the tax deduction he's getting is worth more than however much he thinks he's losing in actual allocations.