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CuseFan

Cash Balance Minimum Participation and ROR ICR Plans

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Having a discussion with a colleague regarding minimum participation under IRC Section 401(a)(26), the IRS memo-induced 0.5% accrual rate threshold and cash balance plans that use actual rate of return interest crediting rates (ROR ICR). 

HCE with comp of $260k and $13k contribution credit (5% of pay) in an ROR ICR plan has a 0.39% normal accrual rate due to negative return in 2018 and zero percent projected interest, causing the plan to fail 401(a)(26) if one applied the IRS memo as if it were law or regulation (which it is not), whereas I argue that in what facts and circumstances universe (which is the law and regulation) is a 5% annual credit not meaningful, and why should a one-year interest rate hiccup/blip turn a very meaningful credit into one that is not?

By that standard, every ROR ICR plan that does not have a contribution credit in excess of 6% for 40% or 50 employees would otherwise fail 401(a)(26) every year they experienced an investment loss and would be required to increase contribution credits. I find that ludicrous, and it ultimately creates a de facto (albeit indirect) interest credit floor so to speak, which you could not do directly because of the market ICR rules. So ROR is good, employee wins, ROR is bad, employee still wins - yes, that's kind of the DB premise, but it's not the market rate premise.

Thoughts from those with experience on ROR ICR plans and dealings with IRS on the issue, including the 0.5% accrual rate line in the sand.

Thanks

 

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I think it would make sense in this case to assume a positive projected ICR for purposes of 401(a)(26). If the ROR is negative and you use that rate for 401(a)(26), you're basically saying that you assume the ROR will be negative (or zero, if that's what you've assumed) for all future years, which seems unreasonable.

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For nondiscrimination testing we have to project at zero. I agree that assuming all future years are zero is not reasonable, but I don't see a basis for using a different rate for 401(a)(26) so the math works out. My argument is more that assumption is unreasonable so ignore it and look at the facts and circumstances, which how can a 5% allocation not be considered meaningful?

Just wondering if anyone out there is making that case or toeing the 0.5% line arbitrarily determined by IRS in a different world over 15 years ago?

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If it is a preapproved plan you are looking at, then unfortunately the IRS can say to the document provider "Put this in the document if you want to get an approval letter." They can do so as a matter of policy. Their demand need not be one of the listed "do's" and "don'ts" in the reapproved program Rev. Proc.  If you are using a preapproved DB plan with the .5% fail-safe (which to my knowledge will always be the case), you'd better be prepared for a spirited discussion with the IRS (on audit) as to why you didn't follow the plan language. Here's the thing: The IRS will entertain reasonable modifications to preapproved language on a Form 5307, so you might wish to give that a shot. That's their position, they say to providers to just tell the advisor to "send that situation in on a Form 5307." If the IRS consistently issues favorable determination letters on a certain design, then they will be more likely to want to approve that design in the next preapproved plan cycle because they have another competing policy, namely, to reduce the number of determination letter applications. And then, if approved, send that approved language that you devised to your document provider so it can be (maybe) included in that provider's next draft specimen plan. That's the best way to get the ball rolling. (Recall when "new comparability" was too radical for preapproved DC plans.)

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CuseFan, I'm with you. The IRS has determined that a 3% allocation in a 401k plan is enough to buy your way out of the ADP test and meet the top-heavy minimum. That seems pretty significant. How can they say a comparable 3% allocation in a CB plan isn't even "meaningful"? Well, they can say it, but I'd definitely argue the point. BTW, the Relius volume submitter language refers to "Participants who receive meaningful benefits within the meaning of Code Sec. 401(a)(26)" - no mention of a minimum .5% accrual.

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41 minutes ago, digger said:

CuseFan, I'm with you. The IRS has determined that a 3% allocation in a 401k plan is enough to buy your way out of the ADP test and meet the top-heavy minimum. That seems pretty significant. How can they say a comparable 3% allocation in a CB plan isn't even "meaningful"? Well, they can say it, but I'd definitely argue the point. BTW, the Relius volume submitter language refers to "Participants who receive meaningful benefits within the meaning of Code Sec. 401(a)(26)" - no mention of a minimum .5% accrual.

Well, it does make some sense if you are saying the 3% allocation in the CB plan will be earning 0% return for all future years. But that return assumption seems ridiculous.

Personally, I would feel comfortable justifying it is a meaningful benefit. But, it is a good idea to check and see what the plan document says about meaningful benefits and 401a26 first. That could change my opinion.

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So the document says, "if the plan fails minimum participation, then...."

My contention is the plan doesn't fail because this particular benefit is meaningful. Furthermore, the plan limits participation to owners and spouses, and we have enough for 40% participation, so it's not a situation where NHCEs are not hitting that 0.5% threshold.

I also read a reputable actuary's article about the problem with low interest rates and minimum participation issues, and I agree that can happen, especially with a plan covering NHCEs. The article was followed up by an attached statement/comment by another actuary in same firm that the 0.5% threshold does not apply to shareholders, but he gave no specific cite or reason for backup.

Given that the IRS memo was written in the context of providing low allocations to NHCEs and claiming such to be benefiting, which they view as abusive, I can see not having to apply the threshold to owners.

This was blip for 2018 because interest was negative and so we project at zero, so we may just increase this owner to 6.5% or 7% of pay to avoid "actuarial controversy" in the future, which is ironic in the context of the IRS memo and the abuses it is trying to attack.

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Or test on accrued to date. 

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On 2/22/2019 at 4:23 PM, Mike Preston said:

Or test on accrued to date.

Accrued to date for 401(a)(26)?

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Sure, why not? 

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I agree with Mike on using accrued to date.  I can tell you that the IRS in the past has challenged pay credit rates in excess of 10% and flat dollar pay credits in excess of $10k for not being meaningful based on the .5% accrual standard ( this was years ago when many plans had very very early NRAs)

What do you base the 0% projection on?  IRS allows that floor for purposes of backloading testing under 411(b) , but I don't recall that for 401a26

 

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On 2/25/2019 at 4:10 PM, ak2ary said:

What do you base the 0% projection on?  IRS allows that floor for purposes of backloading testing under 411(b) , but I don't recall that for 401a26

It's an actual ROR on plan assets ICR, and the plan had a loss for the year, and to get a normal accrual rate we project using the plan's current ICR (or using zero if negative).

Using accrued to date, instead of projecting current credit to NRA at 0% we project the account balance, so that's only going to help if there was a history of substantial interest credits in prior years. Unfortunately, that is not the case.

Thanks

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