Defined benefit and contribution lump sums may be aggregated for testing

Plain-English summary

A company maintained a closed defined benefit plan and a defined contribution plan and wanted to aggregate them for coverage and nondiscrimination testing. Both plans offered vested participants a single-sum distribution at termination, but the defined benefit plan converted an annuity using section 417(e) assumptions while the defined contribution plan paid the vested account balance. The IRS ruled that these were separate optional forms of benefit because their calculation methods differed. They nevertheless could be aggregated for nondiscrimination testing because each plan's lump sum was the minimum payable amount for its respective accrued benefit and thus was inherently equal in value relative to that benefit.

Ruling snapshot

• Question: May the two plans' single-sum benefits be treated as one optional form of benefit when the defined benefit and defined contribution plans are aggregated for nondiscrimination testing?
• Outcome: Mixed; they are separate optional forms, but they may be aggregated for testing under Treasury Regulation section 1.401(a)(4)-4(d)(4)(i).
• Key authorities: IRC §§ 401(a)(4), 410(b), and 417(e); Treas. Reg. §§ 1.401(a)(4)-4 and 1.401(a)(4)-9

Full text (IRS public release)

Internal Revenue Service                                      Department of the Treasury
                                                              Washington, DC 20224

Number: 201605006                                             Third Party Communication: None
Release Date: 1/29/2016                                       Date of Communication: Not Applicable
Index Number: 401.04-00, 401.04-03
                                                              Person To Contact:
----------------------                                        ----------------------, ID No. ------------------
--------------------------------------                        Telephone Number:
---------------------------------                             ----------------------
----------------------                                        Refer Reply To:
 ----------------------------------------------------         CC:TEGE:EB:QP2
                                                              PLR-121777-15
                                                              Date:
                                                              October 28, 2015


Legend

 Plan A         =      ---------------------------------------------------
 Plan B         =      ----------------------------------------------------------------------------
 Company        =      ---------------------------------
 State          =      --------------
 Country        =      -------
 Date 1         =      -----------------------
 Date 2         =      ---------------------------

Dear --------------:

This letter is in response to your ruling request, dated June 22, 2015, submitted by your
authorized representative, and supplemented by correspondence from your authorized
representative dated July 31, 2015, concerning the treatment of Plan A and Plan B
under section 401(a)(4) of the Internal Revenue Code (the Code) and its accompanying
regulations.

The following facts and representations are submitted under penalties of perjury in
support of your request:

The Company is a distributor of manufactured goods with its principal offices located in
State. The Company maintains Plan A, a defined benefit plan, and Plan B, a defined
contribution plan. Plan A was closed to new participants as of Date 1, but continues to
provide ongoing accruals to the participants who were participating in the plan prior to
Date 2.

Both Plan A and Plan B include single-sum distribution options available to all vested
plan participants at termination of employment. The single sum benefit provided by
Plan A is unsubsidized and is determined by converting the normal form of annuity
benefit to a lump sum using the actuarial assumptions set forth in section 417(e)(3). In
PLR-121777-15                                 2

the case of Plan B, the single sum benefit is equal to the participant’s vested account
balance and, therefore, does not require a similar conversion.

The Company would like to aggregate Plan A and Plan B for purposes of satisfying the
coverage and nondiscrimination tests as permitted under §1.401(a)(4)-9.

Based on the above facts and representations, you have requested a ruling that if Plan
A and Plan B are aggregated for purposes of nondiscrimination testing, and single sum
benefits are available under both plans for all participants upon termination of
employment, then it is permissible to test such single sum benefits as a single optional
form of benefit for purposes of satisfying the benefits, rights and features test under
section 401(a)(4) and §1.401(a)(4)-4.

Section 410(b) provides generally that a plan is a qualified plan only if the classification
of employees who benefit under the plan does not discriminate in favor of highly-
compensated employees (HCEs).

Section 410(b)(6)(B) provides that two or more plans can be aggregated for purposes of
satisfying section 410(b), but only if those plans are also aggregated for purposes of
section 401(a)(4).

Section 401(a)(4) provides that a plan is a qualified plan only if the contributions or
benefits provided under the plan do not discriminate in favor of HCEs.

Section 1.401(a)(4)-4(a) provides rules for determining whether the benefits, rights, and
features provided under a plan (i.e., all optional forms of benefit, ancillary benefits, and
other rights and features available to any employee under the plan) are made available
in a nondiscriminatory manner. Benefits, rights, and features provided under a plan are
made available to employees in a nondiscriminatory manner only if each benefit, right,
or feature satisfies the current availability requirement of paragraph (b) of that section
and the effective availability requirement of paragraph (c) of that section.

Section 1.401(a)(4)-4(b)(1) provides that the current availability requirement is satisfied
if the group of employees to whom a benefit, right, or feature is currently available
during the plan year satisfies section 410(b) (without regard to the average benefit
percentage test of §1.410(b)–5). In determining whether the group of employees
satisfies section 410(b), an employee is treated as benefiting only if the benefit, right, or
feature is currently available to the employee.

Section 1.401(a)(4)-4(b)(2)(ii)(B) provides that specified conditions on the availability of
a benefit, right, or feature such as requiring a specified percentage of the employee’s
accrued benefit to be non-forfeitable, termination of employment, death, disability, or
hardship are disregarded in determining the employees to whom the benefit, right, or
feature is currently available.
PLR-121777-15                                  3


Section 1.401(a)(4)-9(b)(3)(i) provides that a DB/DC plan is deemed to satisfy
§1.401(a)(4)-4(b)(1) with respect to the current availability of a benefit, right, or feature
other than a single sum benefit, loan, ancillary benefit, or benefit commencement date
(including the availability of in-service withdrawals), that is provided under only one type
of plan (defined benefit or defined contribution) included in the DB/DC plan, if the
benefit, right, or feature is currently available to all non-highly compensated employees
in all plans of the same type as the plan under which it is provided.

Section 1.401(a)(4)-4(c) provides that the effective availability requirement is satisfied
only if, based on all of the relevant facts and circumstances, the group of employees to
whom a benefit, right or feature is effectively available does not substantially favor
HCEs.

Section 1.401(a)(4)-4(e)(1)(i) provides that different optional forms of benefit exist if a
distribution alternative is not payable on substantially the same terms as another
distribution alternative. The relevant terms include all terms affecting the value of the
optional form, such as the method of benefit calculation and the actuarial assumptions
used to determine the amount distributed.

Section 1.401(a)(4)-4(d)(4)(i) provides that an optional form of benefit may be
aggregated with another optional form of benefit and treated as a single optional form
provided that one of the two optional forms of benefit is of inherently equal or greater
value than the other, and the optional form of benefit of inherently equal or greater value
separately satisfies the current and effective availability tests.

Under §1.401(a)(4)-4(e)(1)(i), the single sum benefits provided by Plan A and Plan B
are two separate optional forms of benefit for purposes of benefits, rights, and features
testing because different methods are used to calculate the amount of the two single
sum benefits and different actuarial assumptions are used to determine the amount
distributed (the amount of the single sum benefit under Plan A is calculated by
converting the normal form of annuity benefit using the actuarial assumptions specified
under section 417(e), whereas the amount of the single sum benefit under Plan B is the
vested account balance.)

In addition, the single sum benefits provided by Plan A and Plan B are not eligible for
the “deemed satisfaction” rule set forth in §1.401(a)(4)-9(b)(3)(i) because single sum
benefits are explicitly excluded from the list of benefits, rights, or features to which the
rule applies.

The single sum benefits can be aggregated pursuant to §1.401(a)(4)-4(d)(4)(i),
however, because the single sum benefit provided by Plan A and the single sum benefit
provided by Plan B are both of inherently equal or greater value with respect to each
other. That is, the single sum benefit provided under each plan is the minimum amount
PLR-121777-15                                  4

that can be paid on behalf of the accrued benefit under each plan, and therefore both
single sum benefits are of equal value in relation to the accrued benefit under the
respective plans.

We conclude that the unsubsidized single sum benefit provided by Plan A upon
termination of employment and the single sum benefit provided by Plan B upon
termination of employment may not be treated as a single optional form of benefit under
§1.401(a)(4)-4(e)(1)(i), but may be aggregated for nondiscrimination testing purposes
under §1.401(a)(4)-4(d)(4)(i) notwithstanding that the benefit under Plan A must be
converted to a lump sum using section 417(e) assumptions.

The ruling contained in this letter is based upon information and representations
submitted by the taxpayer and accompanied by a penalties of perjury statement
executed by an appropriate party. While this office has not verified any of the material
submitted in support of the request for the ruling, it is subject to verification on
examination.

This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) provides that
it may not be used or cited as precedent.

In accordance with the Power of Attorney on file with this office, a copy of this letter is
being sent to your authorized representatives.

                                       Sincerely,

                                       /S/

                                       Linda S.F. Marshall
                                       Senior Attorney, Qualified Plans Branch 1
                                       (Office of Chief Counsel, TEGE)