Workshop 4 Combination Design

8/5/2016

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Workshop 4Combination Design

Sara DeFilippo

Dunbar, Bender & Zapf Inc.

Karen Smith

Nova 401(k) Associates

Why?

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Agenda

• Employer match

• PBGC premiums

• Mortality changes (time permitting)

Not on Agenda

• Issues related to cash balance interest

crediting rates – Larry is discussing in

Workshop 6

Use of employer matches in combination

plan design

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Employer Match

Hypothesis: Employer match is under

utilized in cb combo designs.

Employer Match - Why?

Why look at employer match?

• Often does not cost much

• Employees irrationally love matches

• May incent NHCEs to defer more

Employer Match - Why?

Why look at employer match (cont)?

• Counts towards top heavy

• May reduce required gateway

• Primarily defined benefit in nature

• Withdrawn proposed 401(a)(4) regulations

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Employer Match

• Gateway issues

• Primarily db in nature

• Triple stack match

Employer Match – Safe Harbor

The “free” 4%

• For safe harbor 401(k) plans (non-elective

or matching) may have a discretionary

matching contribution that does not

exceed 4.0% of compensation

• So this can be evaluated at year-end as

you complete your 401(a)(4) testing

Employer Match – ACP Test

• For plans subject to ACP testing the

employer match must satisfy the ACP test

• Remember that disproportionate NHCE

employer matches must be excluded from

ACP test

• BRF testing

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Employer Match - Gateway

• Two ways employer match may help with

the gateway:

1. Lower required gateway by lowering HCE

equivalent allocation rate

2. Eliminate some NHCEs from needing to

receive gateway


• Profit sharing and safe harbor non-

elective contributions count toward

• Deferrals and employer match do not

count toward allocation rate

• Shifting HCE profit sharing to employer

match may lower required gateway


Highest HCE EquivalentAllocation Rate Minimum Gateway

Under 15% 1/3 of HCE rate

15-25% 5.0%

25-30% 6.0%

30-35% 7.0%

35% or more 7.5%

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Employer Match – Reduce Gateway

Minimum Gateway

HCE Equivalent Allocation in CB Plan 27%

Profit Sharing Contribution 6%

Total 33%

Required Gateway 7%


Minimum Gateway

HCE Equivalent Allocation in Cash Balance Plan

27%

Profit Sharing Contribution 2%

Employer Match 4%

Total Equivalent Allocation Rate (disregard

match)

29%

Required Gateway 6%


• Giving the additional employer match to

the HCE will increase the match cost for

the NHCEs (unless no NHCE defers)

• So, is total cost reduced? Depends on

demographics, but sometimes yes.

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• Only NHCEs who benefit need to be

provided the gateway. Who is benefiting?

– Safe harbor non-elective or QNEC

– Profit sharing

– DB allocation

– Top heavy minimum as non-elective

contribution

• Not benefiting if only receive a match


So, how does this help us?

• If we have a group of higher paid NHCEs

who are not benefiting in the cash

balance plan, maybe design with a

generous safe harbor match instead of a

safe harbor non-elective contribution.

Case Study 1

• Paraprofessionals (all non-key, NHCEs) are

excluded from the cash balance plan and

only participate in 401(k) plan.

• Does anyone disagree that the top heavy

minimum for the paraprofessionals is 3%

of compensation instead of 5% of

compensation?

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Case Study 1-No Match

• Design with a 3% non-elective safe harbor

• All NHCEs must receive gateway

– PS of 4.5% for paraprofessionals

– PS of 3.6% for clerical

• Total cost of staff contribution -$49,882

• Total owner deferral - $432,000

Case Study 1-No MatchName Age HCE Comp 401k SHNE PS CB Total

Owner 1 57 Y 265,000 24,000 7,950 12,050 100,000 144,000

Owner 2 62 Y 265,000 24,000 7,950 12,050 100,000 144,000

Owner 3 59 Y 265,000 24,000 7,950 12,050 100,000 144,000

Para 1 47 N 115,000 8,000 3,450 5,175 0 16,625

Para 2 57 N 110,000 18,000 3,300 4,950 0 26,250

Para 3 52 N 100,000 7,500 3,000 4,500 0 15,000

Para 4 62 N 100,000 0 3,000 4,500 0 7,500

Para 5 42 N 95,000 7,500 2,850 4,275 0 14,625

Clerical 1 37 N 20,000 0 600 720 500 1,820

Clerical 2 32 N 22,000 0 660 792 500 1,952

Clerical 3 34 N 25,000 250 750 900 500 2,400

Clerical 4 41 N 30,000 0 900 1,080 500 2,480

Clerical 5 47 N 30,000 900 900 1,080 500 3,380

1,442,000 114,150 43,260 64,122 302,500 524,032

Case Study 1-Match

• Re-design with a 100% on the first 4% of

compensation deferred safe harbor

• For 4 of the 5 paraprofessionals, top

heavy is satisfied with the employer

match.

• Pick up a small additional cost for the

clerical staff who deferred

• Total cost of staff contribution – 36,332

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Case Study 1-MatchName Age HCE Comp 401k Match PS CB Total

Owner 1 57 Y 265,000 24,000 10,600 9,400 100,000 144,000

Owner 2 62 Y 265,000 24,000 10,600 9,400 100,000 144,000

Owner 3 59 Y 265,000 24,000 10,600 9,400 100,000 144,000

Para 1 47 N 115,000 8,000 4,600 0 0 12,600

Para 2 57 N 110,000 18,000 4,400 0 0 22,400

Para 3 52 N 100,000 7,500 4,000 0 0 11,500

Para 4 62 N 100,000 0 0 7,500 0 7,500

Para 5 42 N 95,000 7,500 3,800 0 0 11,300

Clerical 1 37 N 20,000 0 0 1,320 500 1,820

Clerical 2 32 N 22,000 0 0 1,452 500 1,952

Clerical 3 34 N 25,000 250 250 1,650 500 2,650

Clerical 4 41 N 30,000 0 0 1,980 500 2,480

Clerical 5 47 N 30,000 900 900 1,980 500 4,280

1,442,000 114,150 49,750 44,082 302,500 510,482

Case Study 1 - Summary

Summary of Results

Staff Contribution with SH Non-Elective

49,882

Staff Cost with SH Match 36,332

Savings 13,550

Case Study 1

Is it right that the paraprofessionals who

deferred receive less than the

paraprofessional who chose to defer

nothing?

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Match – Primarily DB

• If a plan is primarily DB in nature, then

the gateway is satisfied.

• If the DC equivalent accrual rate is less

than the DB accrual rate for more than ½

of the NHCEs, then the plan is primarily

db in nature.

• Employer match not included in accrual

rate


How do you make a plan primarily db?

• More in db

• Less in profit sharing

• Fewer people in dc

• More people in db


How do you provide less in profit sharing?

• Satisfy top heavy through employer

match

• It even helps if top heavy is only partly

satisfied through employer match.

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Case Study 2 – No matchName Age HCE Comp 401k SHNE PS CB Total

John Owner 62 Y 265,000 24,000 7,950 8,550 175,000 215,500

Sally Wife 57 Y 150,000 24,000 4,500 12,000 75,000 115,500

Lucy Manager 52 N 75,000 5,000 2,250 2,783 750 10,783 Connie Colleague 41 N 60,000 - 1,800 2,226 750 4,776

Matt Employee 32 N 50,000 - 1,500 1,855 750 4,105

Judy Worker 39 N 50,000 1,500 1,500 1,855 750 5,605 Bee Bookkeeper 65 N 40,000 2,000 1,200 1,484 750 5,434

56,500 20,700 30,753 253,750 361,703

Case Study 2 – No match

• All NHCEs receive gateway of 6.71%

• Total deferral for owners is $331,000

• Total staff contribution is $22,203

Case Study 2 – SH match

• Redesign with SH matching formula- 200%

on the first 3% deferred

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Case Study 2 – SH MatchName Age HCE Comp 401k

SH Match PS CB Total

John Owner 62 Y 265,000 24,000 15,900 16,400 175,000 231,300

Sally Wife 57 Y 150,000 24,000 9,000 - 75,000 108,000

Lucy Manager 52 N 75,000 5,000 4,500 - 750 10,250

Connie Colleague 41 N 60,000 - - 3,000 750 3,750

Matt Employee 32 N 50,000 - - 2,500 750 3,250

Judy Worker 39 N 50,000 1,500 3,000 - 750 5,250

Bee Bookkeeper 65 N 40,000 2,000 2,400 - 750 5,150

56,500 34,800 21,900 253,750 366,950

Case Study 2 – SH MatchName Age HCE Comp 401k

SH Match PS CB Total

John Owner 62 Y 265,000 24,000 15,900 16,400 175,000 231,300

Sally Wife 57 Y 150,000 24,000 9,000 - 75,000 108,000

Lucy Manager 52 N 75,000 5,000 4,500 - 750 10,250

Connie Colleague 41 N 60,000 - - 3,000 750 3,750

Matt Employee 32 N 50,000 - - 2,500 750 3,250

Judy Worker 39 N 50,000 1,500 3,000 - 750 5,250

Bee Bookkeeper 65 N 40,000 2,000 2,400 - 750 5,150

56,500 34,800 21,900 253,750 366,950


• Total deferral for owners is $339,300 (additional deferral of $8,300)

• Total staff contribution is $19,150 (savings of $3,053)

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Was it worth it to save $3,053?

• Maybe…

• Close to top heavy minimum

Triple Stack Match

Satisfy entire or large portion of the DC

Section 415 limit using triple stack match

• Safe harbor match

• Fixed match

• Discretionary match

Case Study 3 –With PSName Age HCE Comp 401k SHNE PS CB Total

Owner 1 57 Y 265,000 24,000 7,950 27,050 80,000 139,000

Owner 2 62 Y 265,000 24,000 7,950 27,050 80,000 139,000

Employee 1 49 N 35,000 - 1,050 1,439 250 2,739

Employee 2 39 N 33,000 - 990 1,356 250 2,596

Employee 3 25 N 27,500 - 825 1,130 250 2,205

Employee 4 32 N 26,000 - 780 1,069 250 2,099

Employee 5 35 N 23,000 - 690 945 250 1,885

Employee 6 22 N 22,000 - 660 904 250 1,814

Employee 7 30 N 21,000 - 630 863 250 1,743

Employee 8 32 N 22,000 - 660 904 250 1,814

Employee 9 28 N 25,000 - 750 1,028 250 2,028

Employee 10 22 N 19,000 - 570 780 250 1,600

Employee 11 27 N 18,000 - 540 740 250 1,530

48,000 24,045 65,258 162,750 300,053

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Case Study 3 -Triple Stack Match

When $35,000 is provided to HCE as profit

sharing contribution:

• Required gateway – 7.5%

• Total HCE deferral - $278,000

• Total staff cost - $22,053


Redesign with triple stack match

• Safe harbor match – 100% on first 4%

• Fixed match – 87% on first 6%

• Discretionary match 66.67% on first 6%


Works out to be a total employer match of

• 253.67% on first 4% deferred

• 153.67% on next 2% deferred

So, if an employee defers 6% of compensation,

the employee receives an employer match of

13.21% of compensation

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Case Study 3 –With TSMName Age HCE Comp 401k Match PS CB Total

Owner 1 57 Y 265,000 24,000 35,000 - 80,000 139,000

Owner 2 62 Y 265,000 24,000 35,000 - 80,000 139,000

Employee 1 49 N 35,000 - - 1,750 250 2,000

Employee 2 39 N 33,000 - - 1,650 250 1,900

Employee 3 25 N 27,500 - - 1,375 250 1,625

Employee 4 32 N 26,000 - - 1,300 250 1,550

Employee 5 35 N 23,000 - - 1,150 250 1,400

Employee 6 22 N 22,000 - - 1,100 250 1,350

Employee 7 30 N 21,000 - - 1,050 250 1,300

Employee 8 32 N 22,000 - - 1,100 250 1,350

Employee 9 28 N 25,000 - - 1,250 250 1,500

Employee 10 22 N 19,000 - - 950 250 1,200

Employee 11 27 N 18,000 - - 900 250 1,150

48,000 70,000 13,575 162,750 294,325


When $35,000 is provided to HCE as a triple

stack match:

• Required gateway – less than TH of 5%

• Total HCE deferral - $278,000

• Total staff cost - $16,325


Cost% Subject to

Vesting Schedule

Owners receive ps 22,053 55%

Owners receive match 16,325 100%

Savings 5,728 N/A

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Spouse HCE

• Young

• Low paid

• Wants to defer

• ABPT failed

Case Study 4

• 43 year old owner/23 year old wife

• Fail ABPT – husband passes rate groups on ratio percentage test

• Use component plan to get wife small profit sharing

• Use employer match to get additional deferral – 331% on first 4%

Case Study 4



• Discretionary match 100% on first 4%

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Case Study 4Name Age HCE Comp 401k Match PS CB Total

Owner 43 Y 265,000 18,000 35,000 0 100,000 153,000Wife 23 Y 30,000 18,000 3,972 1,500 0 23,472Employee 1 45 N 30,000 0 0 1,500 250 1,750Employee 2 35 N 33,000 0 0 1,650 250 1,900Employee 3 21 N 27,500 0 0 1,375 250 1,625Employee 4 28 N 26,000 0 0 1,300 250 1,550Employee 5 31 N 23,000 0 0 1,150 250 1,400Employee 6 18 N 22,000 0 0 1,100 250 1,350Employee 7 26 N 21,000 0 0 1,050 250 1,300Employee 8 28 N 22,000 0 0 1,100 250 1,350Employee 9 24 N 25,000 0 0 1,250 250 1,500Employee 10 18 N 19,000 0 0 950 250 1,200Employee 11 23 N 18,000 0 0 900 250 1,150

36,000 38,972 14,825 102,750 193,547

Case Study 4 – Live on the Edge

Redesign to get wife to DC 415 limit



• Discretionary match 66.67% on first 6%

Case Study 4Name Age HCE Comp 401k Match PS CB Total

Owner 43 Y 265,000 18,000 35,000 0 100,000 153,000Wife 23 Y 30,000 18,000 10,500 1,500 0 30,000Employee 1 45 N 30,000 0 0 1,500 250 1,750Employee 2 35 N 33,000 0 0 1,650 250 1,900Employee 3 21 N 27,500 0 0 1,375 250 1,625Employee 4 28 N 26,000 0 0 1,300 250 1,550Employee 5 31 N 23,000 0 0 1,150 250 1,400Employee 6 18 N 22,000 0 0 1,100 250 1,350Employee 7 26 N 21,000 0 0 1,050 250 1,300Employee 8 28 N 22,000 0 0 1,100 250 1,350Employee 9 24 N 25,000 0 0 1,250 250 1,500Employee 10 18 N 19,000 0 0 950 250 1,200Employee 11 23 N 18,000 0 0 900 250 1,150

36,000 45,500 14,825 102,750 199,075

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Case Study 4 – Live on the Edge

• What happens if Employee 1 defers 6% of

compensation?

• Wahoo! She will get the employer match

of $10,500.

– Tiny reduction in PS

– Most of it subject to vesting schedule

PBGC Premiums

PBGC Premiums

OMG! PBGC premiums are up a lot! How

might this affect combination plan design?

• Fixed per participant premium increasing

from $64 in 2016 to $80 in 2019

• Variable premium rate increasing from 3%

in 2016 to 4.1% in 2019

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PBGC Premiums

Possible design implications??

• Lower interest crediting rates

• Push benefits to profit sharing plan

• More carve-outs from defined benefit plans

• More 11g amendments for defined benefit plans

• More traditional defined benefit plans

• More floor offset plans

• Other?

PBGC Premiums–PBGC whipsaw

• No HATFA relief for PBGC premiums

• If using an interest crediting rate of 6.0%

and discounting back at a lower rate for

vested liability for PBGC premiums can

end up with a variable premium on a

“well-funded” plan

• Lower interest crediting rate?

PBGC Premiums–PS Benefits

• In many small plans, almost all of the liability is for the principal. So, to bring down the liabilities, the most impact comes from reducing the principal liability.

• Maybe actuaries will start by having psmaxed out and design smaller benefits for principals in db plan

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PBGC Premiums–Carve-outs

• Unless the plan document is written with

surgical accuracy, there are always some

NHCEs included in the plan who do not

contribute to passing testing or even the

plan sponsor’s objectives.

• Including all employees is a positive from

an employee communication and policy

perspective.

PBGC Premiums–Carve-outs

• With the carrying costs for these individuals increasing so much due to the higher PBGC premiums, will we see increased use of very targeted carve-outs to truly minimize the number of NHCEs covered?

• Will carve-out use increase to keep professional groups under 25 active participants?

PBGC Premiums–11g amendments

• Will actuaries risk the cost of an 11g

amendment to prevent covering too many

NHCEs?

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PBGC Premiums – Traditional DB

• The PBGC variable premium is based

upon vested benefit liabilities.

• Congress has been pushing vesting

periods shorter and shorter in DC plans

and cash balance plans.

PBGC Premiums – Traditional DB

• A cash balance plan must be 100% vested

after 3 years.

• A traditional defined benefit plan can still

have a graded vested schedule of 2/6 if

top heavy or 3/7 if not top heavy.

• A non top heavy traditional defined

benefit plan can still have a five year cliff

vesting schedule.

PBGC Premiums – Floor Offsets

• A $80 annual premium seems

disproportionate for a NHCE who is

receiving a $500ish cash balance

allocation to satisfy for IRC 401(a)(26).

• Other than carve-outs what can you do?

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• A participant is included in PBGC

participant counts if the plan has benefit

liabilities for that person

• Per 2001 Enrolled Actuaries Blue Book, a

participant does not need to be included

in the PBGC participant count if the

participant’s floor benefit is fully offset.


To satisfy 401(a)(26) on a gross basis:

• DB and DC plan are maintained by the same employer.

• The offset must have accrued under the defined contribution plan.

• The DC offset benefit must be provided on a reasonable and uniform basis.

• The DC offset benefit cannot be used to reduce any other formula.


Do floor offset plans provide the holy grail?

• Get credit for 401(a)(26) and

• No PBGC premium

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PBGC Premiums – Other aspects

• Exclude vesting service prior to plan

effective date

• No past service

• If using pre-retirement decrements,

reduce ancillary benefits.

Mortality Changes

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Mortality Changes

• Expecting mortality table changes….

• How will this impact design and testing?

Mortality Changes

• Cash Balance Plan

– If designed to be under 415 limit in past, may

be able to amend plan to increase owner

benefits.

• Traditional Defined Benefit Plan

– Cost will automatically increase.

Mortality Changes

• Standard mortality table includes the

applicable table under IRC 417(e)

• Applicable table may (?) produce bigger

annuity factors than 1983 IAM – F

– Greater offsets to gateway

– Easier to be primarily db

Documents

Workshop 4 Combination Design