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

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.

Steps to Create a DB(k) Plan

In the ftwilliam.com document system, the DB(k) Plan is composed of three documents, each of which the Employer must sign and make effective: the 401(k) plan document; the defined benefit or cash balance plan document; and the Wrap plan document. The Wrap plan document is an instrument that combines the 401(k) plan and the defined benefit/cash balance plan together into one DB(k) Plan. The system also produces three SPDs, each of which Participants must receive: the 401(k) SPD; the defined benefit or cash balance SPD; and the Wrap SPD. The system produces the Wrap SPD and the 401(k) SPD at the same time.

In order to create a DB(k) plan on the ftwilliam.com document system:

1. You must complete either a defined benefit checklist or a cash balance checklist. Question J.301 of either checklist asks: "Is this plan part of a DB(k) plan under Code section 414(x)?" When question J.301 is answered "Yes", then various edit checks are triggered, to help ensure the defined benefit/cash balance plan complies with Code section 414(x).

2. You must complete a 401(k) volume submitter checklist (in either the prototype or the IDP format). Please note that a 401(k) prototype cannot be used to create a DB(k) Plan. Checklist question J.301 of the 401(k) volume submitter asks: "Is this 401(k) plan part of a DB(k) Plan under Code section 414(x)?" When question J.301 is answered "Yes", additional checklist questions (J.302a through J.311) become available for input. These questions include the name of the DB(k) Plan (the Wrap plan document); the effective date of DB(k); which trust instrument will be used for the DB(k)'s assets; and which plan will be used to resolve ambiguities and supply definitions.

   Checklist questions J.301 through J.311 of the 401(k) volume submitter have two purposes: They trigger various edit checks, to help ensure the 401(k) plan complies with Code section 414(x). In addition, they input data into provisions of the Wrap Plan document and Wrap SPD.

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%.

     For this purpose, Average Annual Compensation is defined pursuant to entries in the DB Checklist (items C.26a through C.26e). However, the number of consecutive years to be averaged in computing Average Annual Compensation cannot exceed 5. Therefore, checklist item C.26a (Average Annual Compensation will be calculated over the following consecutive period:) should be "Specified years", and checklist item C.26c (If C.26a is "Specified years", enter the number of consecutive years to be averaged in computing Average Annual Compensation (minimum of three):) should not be greater than "5". Further, the period over which the consecutive years may be averaged cannot be limited, but must occur within all years of employment with the Company. Therefore, checklist item C.26b (Average Annual Compensation shall be computed taking into account the following years:) should be "All years of employment", and checklist item C.26d.i (If C.26a is "Specified years", the consecutive year period specified in C.26c will occur entirely within the following period:) should be "All years".

     Years of Credited Service is defined as Years of Vesting Service as determined by the provisions of the DB Component. You should consider entering comparable entries in items C.10 through C.13b (Pension - Service) that you will be entering in items D.1 through D.9b (Vesting) which would be applicable to Years of Credited Service - to have comparable vesting and credited service provisions in the DB Component. For instance, checklist item C.12a (Count additional service in computing Years of Credited Service:) should be either "Service prior to participation"; or "Other" and then checklist item C.12b (If C.12a is "Other", describe service:) must have "Service prior to participation" with any other service that is desired to be counted as Years of Credited Service. The service that can be excluded from Years of Credited Service are the same exclusions that apply to Years of Vesting Service: service earned before age 18; service earned before the Employer maintained this Plan or a predecessor plan; the one-year holdout rule (If an Employee has a 1-Year Break in Service/Period of Severance, exclude Years of Credited Service until the Employee has completed a Year of Credited Service after return to employment with the Employer); and , if the DB Component is fully insured, the rule of parity (If an Employee does not have a nonforfeitable right to his/her Employer-provided Accrued Benefit, exclude Years of Credited Service earned before a period of 5 consecutive 1-Year Breaks in Service/Periods of Severance). If any of these exclusions apply to Years of Credited Service, then checklist item C.13a (Exclude other service for purposes of computing Years of Credited Service:) should be "Yes", and the excluded service should be entered in checklist item C.13b (If C.13a is "Yes", describe excluded service:).

   • 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). For this purposes, the 401(k) volume submitter checklist item C.7a (Should Plan provide for automatic enrollment?) must be answered "Yes - Static percentage" and checklist item C.7b (If C.7a is not "No", amount of automatic enrollment election:) must be answered "4%".

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. For this purposes, the 401(k) volume submitter checklist item C.25 (Matching Contribution formula) should be answered "Single rate"; checklist item C.26a (If C.25 is "Single rate" or "Two rates", rate of Matching Contributions (without % sign):) should be answered "50"; and checklist item C.26b (If C.25 is "Single rate" or "Two rates", maximum amount of Employee contributions matched on single rate or first rate (without % sign)) should be answered "4".

   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:

• Effective Date. If this DB(k) plan did not exist before you complete the 401(k) volume submitter checklist (that is, this is a new DB(k) Plan), then you should enter the first day of the DB(k) Plan in checklist question J.304 (Effective Date of the DB(k) Plan:). If this DB(k) Plan previously existed and you are restating the DB(k) Plan, then you should enter the effective date of the restatement in checklist question J.304. If each Component was a separate plan that was not originally intended to be part of DB(k) Plan and those plans are being merged to create the DB(k) Plan, then you should enter the date that the plans are being merged in checklist question J.304.

• Restatement. As previously discussed, if this DB(k) Plan previously existed and you are restating the DB(k) Plan, then you should enter the effective date of the restatement in checklist question J.304 (Effective Date of the DB(k) Plan:). Further, you should answer checklist question J.305a (Is this a restatement of an existing DB(k) Plan:) as "Yes", and you should enter the original Effective Date (the first day of the first Plan Year of the DB(k) Plan) in checklist question J.305b (If J.305a is "Yes", enter original Effective Date of the DB(k) Plan:).

• Merger. As previously discussed, if each Component was a separate plan that was not originally intended to be part of DB(k) Plan and those plans are being merged to create the DB(k) Plan, then you should enter the date that the plans are being merged in checklist question J.304 (Effective Date of the DB(k) Plan:). Further, you should answer checklist question J.306 (Are a prior DB plan and a prior 401(k) plan being merged currently to create this DB(k) Plan:) as "Yes".

• 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.

• Which Trust Is To Be Used. Checklist item J. 307 (Which trust instrument will be used for the DB(k)'s assets:) provides the choice of either the "401(k) trust" or the "DB trust". This choice is triggered because of IRS Notice 2009-71, which defines an "eligible combined plan" as a plan ..."the assets of which are held in a single trust forming part of the plan and are clearly identified and allocated to the defined benefit plan and the applicable defined contribution plan to the extent necessary for the separate application of the Code..." Since both the DB Component and the 401(k) Component have their own trust instruments, only one of those instruments can be used for assets of the DB(k) Plan. If the 401(k) Component permits Participants to direct the investment of all or a portion of their DC accounts, then you should consider selecting "401(k) trust" since that trust would provide appropriate language for Participants to direct the investment of their DC accounts.

• Definition Differences. If there are differences in definitions, other ambiguities or inconsistencies, then the DB(k) Wrap document (and not Code section 414(x)) provides which Component's provisions will prevail. Checklist item J.308. (Which plan will be used to resolve ambiguities and supply definitions:) provides the choice of either the "401(k) plan" or the "DB plan". Either choice is perfectly acceptable, and there are no known circumstances which would favor one choice over the other.

Issues Which Lack Current IRS Guidance and Our Recommendations

The following issues lack current IRS guidance, and we provide recommendations on those issues:

• 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.

Please contact support@ftwilliam.com if you have any questions or if you have any comments regarding this issue.