Group plans are a bit more challenging compared to solo plans. That’s because there are non-owner employees involved, which can complicate testing.
The good news is that there’s a step-by-step process that can be used to facilitate the testing process.
In this guide, we will walk through this process. We will also point out the responsibilities of the administrator, actuary, and the client. Let’s jump in!
Table of contents
Administrator Tasks
It is critical that the administrator performs certain tasks as quickly and accurately as possible. The information they review will be submitted to the actuary. If it is incorrect, it will not only result in bad numbers, but a lot of back-and-forth with the client (and possibly a cranky client).
For the purposes of this article, we will assume that this client has a cash balance plan and also a safe-harbor 401(k) plan. This is the most common structure.
Send the client an employee census
An employee census is typically a spreadsheet that details out specific criteria for each employee. Specifically, the administrator needs to know the following information for each employee that was on payroll during the plan year. Here are the items they must know:
- Name
- Date of birth
- Date of hire
- Termination date (if applicable)
- Hours worked during the year
It is critical that all employees who received a W-2 are on this census. Clients will often say something like “I am the only eligible employee.” But the administrator should not take their word for it. They should still include ALL employees on the census, even if the client believes they are ineligible.
In addition, the actuaries must record hire dates and ages upfront for all employees so they can track eligibility throughout their employment.
Here is a sample employee census =>
Review the census for completeness and accuracy
One of the most important jobs of the administrator is to review the employee census for completeness and accuracy. Because this census will be forwarded directly to the actuary, we want to ensure that all the data fields are accurate and there is nothing omitted.
It is very common for clients to forget to include all the required information on the census. It’s also common for them to mix up dates. For example, they may put the date of hire as the birthdate.
It is critical that the administrator reviews the census ASAP. In some situations, the administrator might not review the information for a week or so after they receive it from the client. If the administrator catches an error after they have had the census for a week, then they must send it back to the client for clarification. The client may not get this back quickly.
Because the goal is to turn the final illustration back to the client in 5 to 10 business days, if errors are not caught upfront, it can severely delay the process. So, reviewing the census within 24 hours of receipt is critical.
Actuary Tasks
Because the actuary is the one actually calculating the numbers, it is essential that they get accurate information from the administrator. Here are the tasks that the actuary will perform:
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Review plan documents
The actuary must first review the plan documents. The plan documents will include eligibility requirements, pay credit percentages, and other formulas. The actuary must have a good understanding of the plan design to make sure the allocation is done correctly.
The actuary must also have the any plan amendments. It is common for amendments to inadvertently not be forwarded to the actuary.
Determine eligible employees
The actuary will typically scan the census and make sure that it is accurate and complete. This is a quick double check on the work that was done by the administrator.
They will take a look through and. determine which employees are eligible. Eligibility requirements will be clearly defined in the plan documents. However, typical eligibility will be as follows:
- Participants must be at least age 21
- They must work at least 1,000 hours during the year
- They will have an entry date that will be bi-annual (Jan 1st and July 1st) and will typically exclude them from participation in the first year.
While the above eligibility requirements are very typical, the actuary must confirm this information by reviewing the plan documents. The actuary must also consider any plan amendments.
Here is more information regarding eligibility => The Complete Eligibility Guide for Cash Balance Plans
Ensure a meaningful benefit
The next step is for the actuary to ensure that 40% of eligible employees receive a “meaningful benefit” under the cash balance plan. For example, the census might have 12 employees on it. Let’s assume only 10 are eligible. Using the 40% rule, four employees must receive a pay credit under the defined benefit plan.
Is a Cash Balance or Defined Benefit Plan Right For You?
How much is a meaningful benefit? As a general rule, it will be 2% to 3% of overall compensation. Younger employees will typically be at 2%, while older employees may need to be at 3% or 4% to pass testing.
Here is more information about the meaningful benefit rules => Cash Balance Plan Meaningful Benefit
Calculate 401(k) match and profit-sharing
Once the actuary determines that they have a clean census, the final 401(k) testing will commence. Because this is a Safe Harbor plan, the actuary will ensure that the company makes the required matching contribution (typically 4%). However, other tests must be passed. These tests will require the company to make an additional profit-sharing contribution for eligible employees.
We have already established that the cash balance plan contribution will be generally 2% to 3% of compensation. Now the actuary will calculate profit-sharing in order to pass testing. In general, this will bring the overall employee contribution to around 10%.
This 10% amount is just approximate. It can be lower if the employee mix is on the younger side. However, it can be substantially higher if the employees are older than the owner.
Remember in order for the contribution allocation to be most favorable, we want owners that are substantially older than their employees with substantially higher compensation amounts. This disparity will result in the most favorable contribution allocation to the owner.
Sample employee allocation
Here is an example of how the allocation might work:
| Employee Age | Cash Balance Allocation | Profit-Sharing Allocation | Total Allocation |
|---|---|---|---|
| 30 | 2% | 8% | 10% |
| 40 | 2% | 10% | 12% |
| 50 | 3% | 15% | 18% |
| 60 | 3% | 20% | 23% |
Calculate maximum funding
The actuary will calculate the minimum funding amount and also a target that keeps the plan funding in line. But the actuary will also calculate a maximum funding amount. While this calculation is complex, we will at least simply the rules.
The IRS does not like underfunded plans. As such, the IRS allows companies to contribute up to 150% of the employee benefit that has already been accrued, in addition to the entire employee benefit earned in the current year.
Essentially, the IRS permits the company to contribute an extra 50% “cushion” above the accrued benefit. Said differently, the company may contribute for the current plan year plus an extra 50% above the required participant balance at the end of the prior plan year.
Here is more information about how the maximum funding range is calculated => Defined Benefit Plan Maximum Funding Range
Final thoughts
Navigating the setup and administration of a group defined benefit plan may seem complex, but with the right guidance, it becomes a powerful tool for long-term retirement planning. By pooling resources and adopting a unified strategy, business owners and key employees can unlock significant tax and retirement benefits—often far beyond what traditional plans offer.
Whether you’re exploring the idea for the first time or looking to refine an existing structure, understanding the process is the first step. With a trusted advisor, customized actuarial support, and a clear implementation roadmap, your group can move forward with confidence and clarity.
If you’re considering a group defined benefit plan, now is the time to evaluate your goals and explore the possibilities. The right structure today can lead to a stronger financial future for all involved.
