Nondiscrimination testing has been likened to rocket science. And that’s in reference to just one flavor of plan. So imagine how exponentially those complexities must increase when the testing involves both defined benefit and defined contribution plans. An April 9 session at the Enrolled Actuaries meeting held by the Conference of Consulting Actuaries and the American Academy of Actuaries in Washington, DC addressed such a situation.
Longtime ASPPA members Richard Block, President of Block Consulting Actuaries, Inc., and Kevin Donovan, managing member of Pinnacle Plan Design, LLC, were the panelists in the discussion.
Plan Requirements
Block and Donovan highlighted several relevant concerns related to plan requirements. Among them:
- All plans must have the same plan year. Plans being aggregated must have the same start and end date.
- Benefits rights and features may not be available on a discriminatory basis. “The premise is that the owners are getting most of their money in the defined benefit plan, and most of the employees are getting theirs in the defined contribution plan,” said Donovan. “There cannot be features in the defined benefit plan that are not in the defined contribution plan,” he added.
- The only qualified plans that may be aggregated to comply with Internal Revenue Code Section 401(a)(4) are model SEPs and SIMPLE plans, and they must be the employer’s only active plans.
- Contributions to 403(b) and SIMPLE plans, and SEPs, cannot be received under Section 401(a)(4), but can be under Internal Revenue Code Sections 404 and 405.
- The 401(k) safe harbor allows principals to contribute to the employee side.
Comparability
To demonstrate comparability, said Block and Donovan, all the participants must have an EBAR at least equal to the DB top heavy minimum EBAR. They noted that Revenue Ruling (Rev. Rul.) 81-202 must be applied, and said that testing for comparability of benefits can be conducted by applying Rev. Rul. 81-202 to project benefits to age 65; however, in the same breath, they termed that revenue ruling “obsolete.”
Eligibility
Eligibility, Block and Donovan said, should be identical for DB and DC plan participants — and the normal retirement age (NRA) should be the same for both kinds of plans, as well. “You’ve got to be really careful here,” cautioned Donovan, noting that problems will arise if the ages for the NRSA for those plans are not. “You should be looking at your documents,” said Block, “very carefully.”
Vesting
Like other plan features, Block and Donovan said, vesting should be the same for all plans. Vesting schedules, they said, are subject to nondiscrimination standards based on all relevant facts and circumstances. The default for all plans, they noted, is the standard minimum schedule.
Block cautioned attendees regarding the importance of specificity in vesting rules. “The problem when you have ambiguous rules,” he said, is that “you don’t know if amounts will be sufficient.”
Allocations
Block and Donovan focused on gateway contributions in their discussion of allocations regarding DB/DC plan testing. The IRS prescribed rules for such contributions in TD 8954, which were effective June 29, 2001 and applicable to plan years that began on or after Jan. 1, 2002.
These regulations prescribe rules for testing DC plans that are aggregated with DB plans for purposes of Code Sections 401(a)(4) and 410(b). These rules apply in situations in which the employer aggregates the plans because one of the plans does not satisfy either of those Code sections standing alone.
The regulations set forth that the combination of a DC plan and a DB plan may demonstrate nondiscrimination on the basis of benefits if the combined plan (the DB/DC plan) is primarily DB in character, consists of broadly available separate plans or satisfies a minimum aggregate allocation gateway requirement that is generally similar to the minimum allocation gateway for DC plans that are not combined with a DB plan.
Block and Donovan are not fans of these rules, and said that the IRS itself has said that they should not be relied upon. “Don’t use it. Please don’t use it,” said Block.
Deductibility
DB plans are covered under Title 4 of ERISA, Block and Donovan reminded, and each type of plan must comply with Code Section 404 separately.
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