Cash balance plans blend the features of a traditional defined benefit retirement structure with the look and feel of a 401(k)/profit-sharing plan.
Annual contribution limits for retirement plans rise significantly in 2022, giving small business owners greater tax deferrals with DB and 401(k) pension plans.
A defined contribution (DC) plan can test on a benefits basis if it meets any of the following criteria:
- Provides broadly available allocation rates
- Provides age-based allocations
- Provides a minimum allocation gateway to non-highly compensated employees (NHCE)
A plan satisfies the minimum allocation gateway test if each NHCE has an allocation rate, which is determined using Internal Revenue Code (IRC) Section 414(s) compensation, that is at least one-third of the highest allocation rate of any highly compensated employee (HCE) participating in the plan.
Alternatively, a plan is deemed to satisfy the gateway test if each NHCE receives an allocation of at least 5% of the employee's IRC Section 415 compensation. Therefore, a DC plan designed to provide a minimum allocation of at least 5% to NHCEs will always be eligible to be cross-tested for nondiscrimination testing.
Aggregated DB/DC plans
To satisfy the minimum gateway for an aggregated defined benefit (DB)/DC plan, each NHCE must have an aggregate normal allocation rate (ANAR) that meets the following requirements:
| Highest HCE ANAR | ANAR for NHCEs |
|---|---|
| Less than 15% | At least 1/3 of the HCE rate |
| 15% to 25% | 5% |
| 25% to 30% | 6% |
| 30% to 35% | 7% |
| Above 35% | 7.5% |
Instead of using each NHCE's equivalent allocation rate under a DB plan in calculating the aggregate allocation rate, it is permissible to use the average of the equivalent allocation rates of all NHCEs benefiting under the DB plan.
Who must receive the minimum allocation gateway?
Employees who receive a safe harbor nonelective contribution, a top-heavy minimum contribution, or a qualified nonelective contribution (QNEC) must receive a minimum allocation gateway contribution, unless they are separately tested under 401(a) as part of a disaggregated group.
If you have questions regarding the minimum allocation gateway, please contact your Milliman consultant.