EBARs for participants over NRA

[Vlad401k]

How do you calculate the EBAR for someone who is nearing or has reached NRA?

Our testing system (DATAIR) for some reason assumes that once the participant reaches NRA (let's say the participant is 67 years old), that his retirement is always 2 years from that point (so in this case, it would be at 69 years old). It uses these numbers for the calculation of EBAR.

So, what happens is that once is someone above 65, his EBAR actually starts increasing (as opposed to decreasing when a participant normally becomes older, assuming everything else is equal).

For some reason, that does not seem right to me. Logically, once the participant reached NRA, he should continue to have 0 years until retirement and the calculation of EBAR should be based on the cross-testing factor table in which the years until retirement should be 0. So basically, it would make sense to me that if the participant receives the same Profit Sharing contribution as a percentage of his compensation year after year, his EBAR should be the same for any age after NRA (65 years of age in our case).

Our documents provide no guidance on this issue.

Could someone with experience with EBARs provide some guidance on this issue?

Thank you for your time.

[NJ Mike]

We also use the DATAIR system for our plans. The EBARs that it is calculating for participants beyond NRD are correct. They are using the annuity factor as of the participant's attained age with 0 years to retirement.

You may want to double check your coding of both plan assumptions as well as the participant data just to make sure. If you have not done so, look at the 410(b)/401(a)(4) Worksheet output provided by DATAIR to see the factors used in their calculation. If you feel confident that their calculations are in error, you may want to post the question on DATAIR's message board or contact them directly.

I disagree with your thought that the EBAR should stay the same each year after NRD if percentage of compensation stays the same. The annuity factor changes each year and will thus the EBARs will be different.

[Tom Poje]

see 1.401(a)(4)-12 definitions

very briefly:
testing age - testing age means the age determined for the employees under the following rules:
(1)...normal retirement age is plan has uniform retirement age
(2) if plan has different retirement ages for different groups use latest retirement age of anyone
(3)if no uniform retirement age use age 65
(4) if an employee is beyond the testing age otherwise determined in (1) through (3) the testing age is the employees current age

65/5 is considered uniform. if perchance the person in question only has 3 years of participation, maybe that is what the software is using, if that is how retirement is coded.

[Vlad401k]

Thanks for the reply guys. That helps to clarify some of the confusion.

NJ MIke,

I just have one quick question regarding what you stated and maybe I'm misinterpreting. Let's say the participant is 65 (0 years to retirement) and another participant is 75 (0 years to retirement as well), do you believe that their EBAR should be different?

The reason I ask is because the Cross-Testing factor table I have access to (the one in DC-3 book among other source) lists factors based on number of years until retirement. From what I understand the EBAR formula references that table, but does not actually have anything to do with the participant's exact age:

EBAR = (contribution)/(factor*compensation)

Since the factor is only based on the number of years until retirement, which presumably everybody at 65 and over has 0 years until retirement, I'm trying to understand why the EBAR seems to increase for anyone over 65. Is there another table that's being referenced?

[NJ Mike]

Vlad401k

Yes, assuming the same percent of pay contribution to both a 65 year old and 75 year old (assuming both have attained their NRD under the plan provisions) would have different EBARs.

In you EBAR calculation, the factor in the denominator is the annuity factor at NRD or if past NRD, at current age. So a 65 year old who has reached their NRD has a different annuity factor than a 75 year old who has attained their NRD and thus the EBARs would be different. Right now, I am also assuming no imputed permitted disparity. Also, accumulation factor is 0.

Look at the 410(b)/401(k) worksheet DATAIR supplies and all the relevant numbers are shown.

Mike

[Tom Poje]

you are correct, since the APR is smaller for someone age 70 than age 65 the EBAR would be larger. The problem can work both ways, at least in regards to an age weighted plan!

I can bore you with the following example I worked out in the book (Coverage and Nondiscrimination Answer Book) I help edit. (Just so the publisher doesn't get mad at me!)This was in regards to an age weighted plan.

Example 11-9

Two employees, one age 65 (Employee 1) and one age 70 (Employee 2), each earn $100,000 per year. Normal retirement age is 65. The plan uses the UP 1984 mortality table, the preretirement interest rate is 8.5 percent, and the postretirement interest rate is 8.5 percent. Contributions for the year total $50,000. If the plan used APR at actual age if one works past normal retirement (assuming an APR of 84.0341 at age 70), the result would be as follows:

Employee 1: $100,000×95.3828×.01=95,382.80 (53.16 percent of total)

Employee 2: $100,000×84.0341×.01=84,034.10 (46.84 percent of total)

[the actual points calculated by a particular software may be different - e.g. the APR used might be a monthly factor, etc) but the end result is the % of total will be the same]

Total Points

179,416.90

Employee 1 will receive $26,581.33 ((95,382.80÷179,416.90)×$50,000)

Employee 2 will receive $23,418.67 ((84,034.10÷179,416.90)×$50,000)

The end result would seem to be discriminatory toward an individual who works past normal retirement age.

to get around the problem many documents are written to use the same APR (to calculate the contribution - not for testing) once someone hits retirement age.

this would result in each employee receiving the same contribution, but then the APRs are messed up...

Note. Neither employee has any years left to retirement.

Employee 1: $25,000×(1.0850)÷95.3828×12÷$100,000=3.145 E-BAR

Employee 2: $25,000×(1.0850)÷84.0341×12÷$100,000=3.570 E-BAR

fortunately, there is a provision in the regs that gets around this

a plan will not fail discrimination testing merely because allocations are made at the same rate for employees who are older than their testing age (determined without regard to the current age rule in paragraph (4) of the definition of testing age in Treas. Reg. § 1.401(a)(4)-12) as they are made for employees who are at their testing age. [Treas. Reg. § 1.401(a)(4)-8(b)(1)(ii)]

note: personally I don't like using my own examples, but I don't have another example I can grab that appears to be close to the question you posed.

[Vlad401k]

Thanks Tom.

Do you know where I can find the full UP 1984 Mortality table?

[Tom Poje]

I see my cut and paste above didn't quite work

1.0850 should be 1.085^0

e.g. if the person was age 62 it would be 1.085^3

I am not familiar with Datair so I can't comment on how it does things. I would assume it the software is calculating things correctly (as NJMike is pointing out)

...........................

well at 8.5% interest

the APRs for UP 84 are

Life

Age Only

--- ----

65 95.3829

66 93.1640

67 90.9263

68 88.6669

69 86.3737

70 84.0346

71 81.6530

72 79.2327

73 76.7777

74 74.3028

75 71.8162

76 69.3275

77 66.8477

78 64.3902

79 61.9391

80 59.5039

[Vlad401k]

Thanks Tom, that is very helpful.

As a side note, do you know if plans have to be consistent from year to year in regards to the tables that are referenced? In DATAIR, we can choose the 1984 mortality table, but there are also others including the 1983 and 1971 tables. If there is no mention of this in the plan documents, can a plan change the tables used from one year to the next?

Thanks again.

[Mike Preston]

Yes.

[Tom Poje]

Mike:

just to make sure, which question did you answer "yes" to?

[Mike Preston]

"If there is no mention of this in the plan documents, can a plan change the tables used from one year to the next?"