1/20/2016
Informal DB
Steven J. Levine, MSPA
Mary Ann Rocco, EA, MSPA
• Testing vs Term’s <500 hours
• Accrued to Date Testing vs Testing Service
• CB Plans vs 8905
• Qualified Replacement Plans
• Testing Age
• Immediate Eligibility
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1/20/2016
Testing vs term’s <500 hrs
• Aggregated DB-DB/DC Plan (not SH-K)
• In 2015 there are 10 non-excludible employees
with 1000+ hours + three (3) terminated
participants with <500 hours.
• PS plan has a 1000 hour requirement to be
eligible for an allocation.
• DB plan has a 1000 hour requirement.
Testing vs term’s <500 hrs
• What is our testing denominator for 401(b) and
401(a)(4)?
• In order for a term with no more than 500 hours to be
an excludable employee and removed from the testing
the plan must require minimum hours and/or EOY
employment to earn a benefit AND the employee:
 Is eligible to participate in the plan
 Does not benefit under the plan for the year
 Fails to receive benefit/allocation solely because of above
requirement(s); and
 Terminates with no more than 500 hours of service during
the year
Testing vs term’s <500 hrs
• The 3 terminated employees can be dropped
from out 410(b) and 401(a)(4) testing as they
are eligible for the PS plan and are not
receiving any benefits due to hours
requirement.
This would not be true if the PS plan had no
allocation requirements
• What about 401(a)(26)?
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1/20/2016
Testing vs term’s <500 hrs
• The regulations allow us to drop terminated
employees with < 500 hours from the 40%
testing but remember the requirement that
they are eligible to participate in the plan
• If the DB plan has no exclusions:
40% x 10 = 4 participant required at .50% of pay or
greater to satisfy 401(a)(26).
• But in fact, the DB plan excludes plumbers, and
two (2) of the terminated ee’s were plumbers
Testing vs term’s <500 hrs
• Now we have:
40% x 12 = 4.8 = 5 participants required at .50% of
pay or greater to satisfy 401(a)(26).
ATD Testing
• The question we are addressing is:
When testing under Accrued to Date (ATD) do
you follow the regulations and treat your DB/DC
as a single plan and develop a single Testing
Service?
Or do you ignore the rules about treating the
aggregated plan as one, and instead use
separate service for the DB vs the DC based on
benefitting years of service?
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1/20/2016
ATD Testing
• PSk effective 1/1/01, NRA 65
• Sponsor funded 15% to employees (and
himself) for all prior years.
• Lot’s of leverage with facts like then vs ATD.
• Set up new DB 1/1/15
 65/3 AEQ 94GAR/5%, QJSA-50%.
Flat formula, $1750 for owner, $15 for others.
ATD Testing
• Sponsor wants to provide employee with DB
benefit plus 7.5% of pay in PS.
Name
HCE
NHCE
DOB
01/01/53
01/01/68
Name
HCE
NHCE
DOH
01/01/85
01/01/00
AA
63
48
Plan
Total
DB
Comp Deferral
PS
Benefit
$265,000 $23,000 $15,375 $1,750
$35,000 $1,750 $2,625
$15
DB
NRA
65
65
PS
NRA
65
65
Hi 5
Avg Cmp
$255,000
$33,000
ATD Testing
• Only looking at MVAR (ignoring DB-NAR & ABPT)
• DC EBAR = DC allocation converted a SLA at TA ÷
Testing Service.
• DB MVAR is the most valuable optional form
payable at any age converted to SLA at TA ÷
Testing Service.
• Using Annual Method…
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1/20/2016
ATD Testing
Annual Method (without too much detail)
Testing Service = 1
Name
HCE
NHCE
DC
Benefit
$190.93
$110.82
DC
NAR
0.90%
4.03%
DB MV
Benefit
$1,875.58
$25.46
DB
MVAR
8.83%
0.93%
Total
MVAR
9.73%
4.96%
ATD Testing
• Looking at ATD testing…both Participants have 15
YOS in PS plan:
Name
HCE
NHCE
PS
DOP
1/1/01
1/1/01
PS YE
Balance
$706,077
$80,429
YOS
15
15
• Note that under the rules, you can only count testing years in
which the participant ‘benefitted’. If there was a year with no
employer allocation that year(s) would be dropped from Testing
Service. Difficult to manage on takeovers….
ATD Testing
• Accrued to Date Testing where Testing Service
= total service in combined DB/DC plan.
• DC NAR = Total balance converted to an SLA
annuity at TA ÷ Testing Service.
• HCE
$706,077 * 1.085^2 ÷ 94.799 ÷ 15 = $584.54
• NHCE
$80,429 * 1.085^17 ÷ 94.799 ÷ 15 = $226.37
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1/20/2016
ATD Testing
• DB MVAR = Most valuable at TA using the
participant’s total AB at YE ÷ by Testing Service.
• Since the EOY AB = Total AB, we can take our
prior MVAR benefit and ÷ 15:
• HCE
1,875.58 ÷ 15 = $125.04
• NHCE
25.46 ÷ 15 = $1.70
ATD Testing
• ATD using > YOS benefitting in the ‘PLAN’, and
defining the Plan as the combined DB/DC.
Name
HCE
NHCE
DC
Benefit
$584.54
$226.37
DC
NAR
2.75%
8.23%
DB MV
Benefit
$125.04
$1.70
DB
MVAR
0.59%
0.06%
Total
MVAR
3.34%
8.29%
• Makes sense, we are leveraging all those years
the employer provided high allocations to
employees, ie plan was not cross tested.
ATD Testing
2014 Gray Book - Question #40 Nondiscrimination: §401(a)(4) General Testing of Aggregated DB/DC Plans
A DB and DC plan are aggregated for §410(b) and §401(a)(4) testing. The DC plan was effective on
January 1, 2001, and the DB plan was effective on January 1, 2013. Benefits are tested on the basis of
accrual rates using the accrued-to-date method. Which of the following methods of determining testing
service are acceptable?
a)
b)
c)
One testing service amount is used for calculating both DB and DC accrual
rates for each participant and is determined by counting all years in which
the participant benefited in either the DB plan or the DC plan.
Separate testing service amounts are used for calculating the DB accrual
rates and DC accrual rates. Testing Service for determining DB accrual
rates includes years in which the participant benefited in the DB plan, and
testing service for determining DC equivalent accrual rates includes years
in which the participants benefited in the DC plan.
One testing service amount is used for calculating both DB accrual rates and DC equivalent
accrual rates for each participant and is determined by counting all years in which the
participant benefited in both the DB plan and the DC plan (i.e., only years after January 1,
2013 are counted.
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1/20/2016
ATD Testing
• Accrued to Date Testing where Testing Service
calculated separately between DB/DC
• Using Gray Book answer b), DC Testing Svc = 15
and DB Testing Svc = 1
DC
Name Benefit
HCE
584.54
NHCE 226.37
DC
DB MV
NAR
Benefit
2.75% 1,875.58
8.23%
25.46
DB
MVAR
8.83%
0.93%
Total
MVAR
11.58%
9.16%
• If apply this methodology, would use Annual for
testing and bump NHCE up from $2,625
to approximately $5,700.
CB plans vs 8905
• A Cycle EE Cash Balance Plan.
• Form 8905 Adopted in 2014, intention to
adopt a Volume Submitter in the future.
• When will those come out? 2018, 2019?
• In the meantime…
CB plans vs 8905
• Does it make sense to restate the Cash Balance
Plan Document (assuming current document is up
to date)?
I’ve heard no, what say you?
• What if it turns out a particular plan will not ‘fit’
into the volume document?
Can the plan rely on remedial amendment protection?
Can the plan go back to being Individually Drafted?
 How will this work?
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1/20/2016
CB plans vs 8905
• Cycle E plan effective 1/1/10
• First 5 year cycle submission was due 1/31/16.
• Sponsor adopted form 8905 in 2014.
• Plan has not been submitted for an LOD.
• No restatement done in 2016.
• What are the risks (if any)?
Qualified Replacement Plans
• DB documents have to state what happens if plan
terminates and there are ‘excess’ assets.
Reallocate to participants
Revert to employer
• If a plan is covered by Title IV you cannot amend
from reallocation to revert within 5 years of the
plan termination date, ie you are stuck.
Makes sense to use “revert’ as default for Title IV
plans, can always amend later.
• On non-title IV plans you can change at whim.
Qualified Replacement Plans
• If a DB plan terminates and there is a reversion
to the Employer and no Qualified Replacement
Plan (QRP), excise tax = 50%
• If an amount equal to or greater than 25% is
transferred directly to a QRP, the excise tax on
any reversion drops to 20%
• Can transfer up to 100% of the excess.
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1/20/2016
Qualified Replacement Plans
• New/Existing DC plan must cover at least 95%
of active participants in terminated DB plan
• Must allocate ratably over 7 years (or less).
• Non-deductible allocations up to the lesser of
415 DC 415 limit / 100% of pay
• QRP assets must include interest.
Put transfer in separate account with little/no
earnings?
Qualified Replacement Plans
• If not allocated in 7 years, balance reverts at
20% excise tax.
Is that true if 100% transferred (ie there was no
reversion) then not subject to 4980 rules?
Is Jeff here?
Assume owner only. if QRP allocates 415
maximum over 7 years and there is a balance left,
are you subject to a reversion now?
Testing Age
• PS Plan NRA = 65/5
• DB Plan NRA = 62/3
• HCE has
DB NRA = 72
DC NRA = 74
• What is testing age?
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1/20/2016
Testing Age
• Testing Age*: With respect to an employee,
testing age means the age determined for the
employee under the following rules:
(1) If the plan provides the same uniform normal
retirement age for all employees, the employee’s
testing age is the employee’s normal retirement age
under the plan.
*Under 1.401(a)(4)-12 (Definitions)
Testing Age
(2) If a plan provides different uniform normal
retirement ages for different employees or different
groups of employees, the employee’s testing age is
the employee’s latest normal retirement age under
any uniform normal retirement age under the plan,
regardless of whether that particular uniform
normal retirement age actually applies to the
employee under the plan.
Testing Age
(3) If the plan does not provide a uniform normal
retirement age, the employee’s testing age = 65
(4) If an employee is beyond the testing age
otherwise determined for the employee under
paragraphs (1) through (3) of this definition, the
employee’s testing age is the employee’s current
age
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1/20/2016
Testing Age
• If uniform TA = 74
• If not uniform TA – 72
Immediate Eligibility
• Owner starts a company on 5/1/15
• Hires 3 employees, 6/1/15, 7/1/15, 8/1/15
• The goal is to get owner covered while not
covering the employees in year 1.
• Can the plan have 21/1 but ‘waive’ eligibility
requirements for anyone employeed on
5/1/15?
Immediate Eligibility
• Other possible ways:
No service requirement, dual prospective entry.
 Can you then amend to 1 YOS before 1/1/16?
8 month eligibility with last day entry
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1/20/2016
Prevailing Wage Plans
• What is a prevailing wage (Davis Bacon) Plan?
• Group 1 employee Base Pay = $31.39/hr
• ‘Fringe Benefits’ = $19.09.hr
• Fringes paid to ee as wages, or diverted to
Plan.
Prevailing Wage Plans
• Fringes paid into plan can create >25% ctb’s,
not deductible.
• Group 1:
• Base pay = $31.39
• Fringes (exl training) = $18.45
• = 58.78% of pay
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