3796 / What is a combination defined benefit/401(k) plan?

For plan years beginning after December 31, 2009, an “eligible combined plan” (i.e., a combination defined benefit/401(k) plan) is available to employers with two to 500 employees.¹

The assets of the plan will be held in a single trust, and the defined benefit and 401(k) components generally will be subject to their already-existing qualification requirements. The plan will be required to file only one Form 5500² and will have a single plan document.³ The top heavy rules ( Q 3916 to Q 3922) will be deemed satisfied for a combined defined benefit/401(k) plan, and the 401(k) portion will be exempt from ADP/ACP testing ( Q 3753, Q 3802).⁴

The plan’s design generally will be subject to the following requirements:

(1)  The benefit requirement for the defined benefit portion will be satisfied if the annual accrued benefit of each participant is not less than 1 percent of final average pay times up to 20 years of service, or if the plan is a cash balance plan providing pay credits not less than the percentage of compensation determined under the following formula:

Participant’s age as of beginning of year	Cash balance pay credit percentage of compensation
30 or less	2
30 or over, less than 40	4
40 or over, less than 50	6
50 or over	8

For this purpose, “final average pay” is determined using up to five years during which the participant had the highest aggregate compensation from the employer.⁵

(2)  The contribution requirement will be met if the 401(k) plan provides for an automatic contribution arrangement and requires the employer to match 50 percent of elective deferrals of up to 4 percent of compensation.⁶ Nonelective contributions are not precluded but will not count toward satisfying this requirement.⁷

(3)  Employees must be 100 percent vested after three years of service with respect to the defined benefit portion of the plan. Matching contributions under the defined contribution portion must be nonforfeitable, including those in excess of the required match. Any nonelective contributions may be subject to a maximum three-year cliff vesting schedule.⁸

(4)  All contributions, benefits, rights, and features must be provided uniformly to all participants.⁹

(5)  The foregoing requirements must be met without taking into account permitted disparity and amounts under other plans.¹⁰

These criteria are the only circumstances under which a combination defined benefit/401(k) plan may constitute a single plan and trust.

A 401(k) plan will be treated as an automatic contribution arrangement if it provides a default elective contribution percentage of 4 percent and meets specific notice requirements. Employees must receive a notice explaining their right not to have contributions withheld, or to have them made at a different rate, and they must have a reasonable period of time after receipt of the notice to make such elections.¹¹