Recommended Posts

We are the actuaries on a plan the IRS is reviewing to see if the plan meet's 401(a)(26) meaningful benefits. 

The IRS actuary is taking the position that meaningful benefits are determined by taking the end of year total accrued benefit, dividing it by years of credited service and then dividing by testing compensation.  The actuary then compared this result to see if it meets the "0.5% meaningful test".  

Using the accrued benefit seems contrary to our understanding of 401(a)(26).   All information we have on this points to using just the annual credit (as an annuity) and dividing by testing pay.  

Does anyone have any thoughts on this?  Also, has anyone else seen this interpretation by the IRS? 

Thank you.

Share this post


Link to post
Share on other sites

I would think that if you're going to divide by years of credited service, you would also divide by an average compensation.

Otherwise, you're going to divide their average accrual by the current pay? That doesn't make sense to me. You could be giving everyone 0.5% of average pay each year, but if their comps increase, you'll fail the test.

  • Thanks 1

Share this post


Link to post
Share on other sites

Thank you for your response.  That is certainly one of the issues we have with her calculation.

The other we have is that she is mandating the use of an accrued to date testing approach, when we believe an annual approach is also acceptable to use.

Share this post


Link to post
Share on other sites
On 10/9/2018 at 4:36 PM, akollman06 said:

We are the actuaries on a plan the IRS is reviewing to see if the plan meet's 401(a)(26) meaningful benefits. 

The IRS actuary is taking the position that meaningful benefits are determined by taking the end of year total accrued benefit, dividing it by years of credited service and then dividing by testing compensation.  The actuary then compared this result to see if it meets the "0.5% meaningful test".  

Using the accrued benefit seems contrary to our understanding of 401(a)(26).   All information we have on this points to using just the annual credit (as an annuity) and dividing by testing pay.  

Does anyone have any thoughts on this?  Also, has anyone else seen this interpretation by the IRS? 

Thank you.

Having been significantly involved with Paul Schultz when he developed and wrote that 1/2% rule (I was heading the IRS Q&A sessions for ASPPA and Paul would attend our prep meetings), I know from our discussions that he did not intend the rule to be used in this manner of calculation. That doesn't mean the IRS can't change their approach, but this is apples and oranges.  Using current comp vs average accrual (the "divide by years" piece) is nonsensical.  Push back hard.  If you have to, tell the actuary you disagree and that you have to ask her to seek "technical advice".  They hate that because they then have to justify their position to higher ups; just the request alone often gets them to back down.

  • Thanks 1

Share this post


Link to post
Share on other sites

Thank you very much Larry.  I appreciate your advice and will definitely heed it.

All the ASPPA/ACOPA materials we have on this point to calculating 401(a)(26) on an annual basis, so the fact they are trying to mandate this "accrued-to-date" approach seems contrary to general practice.

Share this post


Link to post
Share on other sites

This issue came up at this year's ACOPA conference in Chicago.  In a major session, the IRS rep Michael Spaid stated the rule per the IRS actuary described here, then totally backed down and agreed when everyone said he was misstating the rule and it should be done year by year. 

  • Thanks 1

Share this post


Link to post
Share on other sites

Thank you Andy.  I do recall Michael making the general comment at ACOPA, but couldn't remember if it applied specifically to this issue.  

Share this post


Link to post
Share on other sites

Tell to the IRS actuary that if he/she is using the "accrued-to-date" approach, the total average compensation should be used for a cash balance plan, as you would use for a career average db plan. This should give you the same results as if you just do calculations on the annual basis.

  • Thanks 1

Share this post


Link to post
Share on other sites

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now