DB(k)
- Background
- Recently Issued IRS Guidance for DB(k) Determination Letters
- Steps to Create a DB(k) Plan
- Requirements for DB(k) Plans
- Issues to Consider when Designing a DB(k) Plan
- Issues Which Lack Current IRS Guidance and Our Recommendations
Background
The Pension Protection Act of 2006 (PPA) added Code section 414(x), which allows an employer to create a combination plan that consists of both a 401(k) plan and either (1) a defined benefit plan, or (2) a cash balance plan. This combination plan is known as a DB(k) Plan, and its two Components are known as the 401(k) Component and the DB Component. A DB(k) Plan can be established on or after January 1, 2010.
There are several reasons why an employer may consider establishing a DB(k) Plan. First, the 401(k) Component is not subject to the 401(k) Actual Deferral Percentage (ADP) test or the 401(m) Actual Contribution Percentage (ACP) test, because the 401(k) Component provides required matching contributions that are somewhat less than the basic matching contributions of a safe harbor 401(k) plan. Second, a DB(k) Plan that complies with the requirements of Code section 414(x) during a Plan Year is not required to provide any Top-Heavy minimum contributions or benefits (under either the 401(k) or DB Component), even though the Plan may be Top-Heavy. If the DB Component is a defined benefit plan, then the required minimum benefit accruals are permitted to be significantly less than the Top-Heavy minimum benefit accruals of a Top-Heavy defined benefit plan. If the DB Component is a cash balance plan, then the minimum amount of Employer Credits for a Plan Year are based upon the Participant's age as of the first day of the Plan Year, with greater Employer Credits being credited to older Participants. Lastly, a DB(k) Plan needs to file only one series Form 5500 for the Plan Year, because the two Components of the DB(k) Plan are part of only one plan.
Recently Issued IRS Guidance for DB(k) Determination Letters
Revenue Procedure 2011-6 announced that the IRS will issue determination letters for DB(k) Plans. However, even if one or both Components utilize pre-approved EGTRRA plan documents, the DB(k) Plan is considered to be an individually designed plan. Further, the Plan Sponsor must submit the DB(k) Plan with 2 Form 5300s (a Form 5300 for each Component) and 2 user fees.
Requirements for DB(k) Plans
1. Minimum Required Accrued Benefits of the DB Component.
Traditional Defined Benefit Plan. If the DB Component is a traditional defined benefit plan, then each Participant must receive a minimum annual, employer-provided Accrued Benefit. This minimum Accrued Benefit cannot be less than the Participant's Average Annual Compensation multiplied by the lesser of: (1) 1% multiplied by the Participant's Years of Credited Service with the Company, or (2) 20%.
Cash Balance Plan. If the DB Component is a cash balance plan, then each Participant must receive a minimum annual Employer Credit. This minimum Employer Credit cannot be less than the percentage of Compensation applicable to the Participant in accordance with the following table:
| Participant's Age as of the Beginning of Plan Year | Percentage |
| 30 or less | 2% |
| Over 30, but less than 40 | 4% |
| 40 or over, but less than 50 | 6% |
| 50 or over | 8% |
2. Automatic Contribution Arrangement. The 401(k) Component must be an automatic contribution arrangement in which: (1) Participants are deemed to have elected to make Elective Deferrals in an amount equal to 4% of each Participant's Compensation unless a Participant specifically elects not to have Elective Deferrals made or to have Elective Deferrals made at a different rate, and (2) notice must be given to each Participant in compliance with requirements of Code section 414(x).
3. Minimum Required Matching Contributions of the 401(k) Component. Each Participant on whose behalf Elective Deferrals are made to the 401(k) Component must receive minimum required matching contributions. These minimum required matching contributions cannot be less than 50% of the Participant's Elective Deferrals to the extent such Elective Deferrals do not exceed 4% of Compensation.
However, the Plan may provide more generous, alternate matching contributions, provided that (1) the rate of matching contributions does not increase as the Participant's rate of Elective Deferrals increases; (2) the aggregate amount of matching contributions at each rate of Elective Deferral is not less than the minimum required matching contributions; and (3) the rate of matching contribution for any Elective Deferral of a Highly Compensated Employee at any rate of Elective Deferral cannot be higher than the rate of matching contribution for a Nonhighly Compensated Employee.
4. Vesting. The two Components are subject to the following vesting requirements:
- DB Component. The minimum required Accrued Benefit must vest at least as rapidly as the 3 Year Cliff. If the DB Component is a cash balance plan, then this requirement is already satisfied with its PPA Vesting schedule.
- Matching Contribution Account. The Matching Contribution Account of the 401(k) Component must be fully 100% vested, including any matching contributions that exceed the minimum required matching contributions.
- Profit Sharing Contribution Account. If Profit Sharing Contributions are made to the 401(k) Component, then the Profit Sharing Contributions Account must vest at least as rapidly as the 3 Year Cliff.
Issues to Consider when Designing a DB(k) Plan
The following issues should be considered when designing a DB(k) Plan:
- Profit Sharing Contributions of the 401(k) Component. A DB(k) Plan may provide Profit Sharing Contributions to Participants. However, these Profit Sharing Contributions cannot be used to satisfy the minimum required matching contribution requirements of the 401(k) Component.
- Coverage and Nondiscrimination Testing. All contributions, benefits, rights and features under each Component must be provided uniformly to all Participants. The minimum benefit and contribution requirements cannot utilize the permitted disparity rules under Code section 401(l). Further, the DB Component and the 401(k) Component must meet any nondiscrimination requirements under Code section 401(a)(4) and the minimum coverage requirements under Code section 410(b) without utilizing the permitted disparity rules under Code section 401(l). This means that if Profit Sharing Contributions of the 401(k) Component are allocated on an integrated basis using permitted disparity under Code section 401(l), then the profit sharing contributions may be subject to general nondiscrimination testing without the use of imputed disparity. Further, the DB Component and the 401(k) Component must meet the coverage and nondiscrimination requirements without being combined with any other plan.
- Distributions and Cash-Outs. The timing of a distribution from the DB(k) Plan depends upon the distribution requirements of the Component from which the distribution will be made. For instance, a DB(k) Plan can be designed so that distributions from the 401(k) Component may be made as soon as administratively feasible after Termination of Employment; whereas the DB Component can require Participants to wait until the attainment of Normal Retirement Age before a distribution from the DB Component can be made. However, for purposes of determining whether a Participant's vested interest in the DB(k) Plan exceeds a cash-out threshold, the Participant's vested interest in both Components must be aggregated together.
- Restatement of Previous Plan Documents. If either one or both Component plan documents had previously existed that will form a new DB(k) Plan, then we recommend restating those documents as of the Effective Date of the DB(k) Plan.
- Eligibility and Entry Dates. We highly recommend that the eligibility and entry date provisions of the two DB(k) Components be identical. If the two Components have different eligibility and/or entry date provisions, then uncertain scenarios can result. For instance, if Employees can enter the 401(k) Component before entering the DB Component and since the required minimum matching contributions are less than the 401(k) safe harbor basic matching contributions, then most likely an ADP Test would need to be performed on such Participants' Elective Deferrals. Further, most likely an ACP Test would need to be performed on such Participants' matching contributions.
- Withdrawal Restrictions of Required Matching Contributions. Another uncertainty is whether the minimum required matching contributions are subject to the same strict withdrawal restrictions that apply to ADP safe harbor contributions or qualified non-elective contributions (QNECs), for which in-service distributions prior to attaining age 59-1/2 are prohibited. It may be advisable to impose such withdrawal restrictions on the minimum required matching contributions, just in case the IRS subsequently clarifies the issue and imposes such restrictions.
- Joint and Survivor Annuities. Although the DB Component of the DB(k) Plan must be subject to the joint and survivor (J&S) annuity requirements of Code sections 401(a)(11) and 417, a further uncertainty is whether the 401(k) Component must be subject to those same J&S annuity requirements. Whether the DB(k) Plan can be bifurcated, in the same manner when a money purchase plan is merged into a profit sharing plan (where the J&S annuity requirements only apply to the money purchase assets) is uncertain. It may be advisable to impose the J&S annuity requirements on both the DB Component and the 401(k) Component, in case the IRS subsequently clarifies the issue and imposes such requirements.
Issues Which Lack Current IRS Guidance and Our Recommendations
The following issues lack current IRS guidance, and we provide recommendations on those issues:
