1000 hours and last day for HCE to get contribution

[DanaJ]

I am taking over a CB plan that provides NHCEs have to work 1000 hours to receive the contribution credit but HCEs must work 1000 hours AND be employed on the last day of the plan year?  Is this allowed for HCEs?

[justanotheradmin]

Sure. It favors the NHCE. 

And it's actually decent plan design for some employers because owners who are leaving a company don't have the remaining owners needing to fund more to account for the leaving owner's contribution credit. 

If a law firm has a bad split, the ones left holding the bag might not want huge contribution credits for the partners that just left. 

[Lou S.]

I was under the impression that defined benefit plans could not have a last day requirement. That you could require more than 1000 hours for accrual but if you did you had to give partial accrual for 1000 hours. Is there an exemption for HCEs?

[AndyH]

I think Lou is correct.   Failure to be employed on the last day is not a permitted exclusion under 411 for a DB plan.

[justanotheradmin]

Ah yes. I think Lou is right. I work with 401(k) plans much more frequently. 

I can confirm I have seen partial accruals for HCE in CB plans. 

[Calavera]

I agree that defined benefit plans could not have a last day requirement. However, if you have a determination letter, just amend the plan to remove this provision on a prospective basis for 2019 and future years.

[Doc Ument]

Some providers have been known to get this "allocation condition" option approved (and preapproved) by the IRS by providing benefit accruals throughout the year via a principal credit periods that are shorter than the plan year and for which there are no hours requirement, which means I guess that no accrual needs to be credited for the principal credit period that ends on the last day of the plan year if the participant is no longer employed. I am not going to take sides on the merits or lack thereof, or whether or not such a feature is useful. (I am just the messenger.)

[Mike Preston]

As long as there are enough principal credit  periods the exclusion of 1 of them would seem to provide enough accrual to satisfy 411.

[Hojo]

I actually had a CB plan have a last day rule that got IRS approval.  I questioned the design annually and they fought me on it every time indicating the IRS approval letter.  I still wonder how that got through.

[AndyH]

I remember many years ago the Cash Balance Answer Book stated that a cash balance plan could have a last day provision.   I researched it extensively and emailed the authors to check that and never got a reply. (I don't remember their names).  I believe that was changed in the subsequent edition.

[Calavera]

About 5 years ago during EA meeting, I discussed a “last day rule” in a cash balance plan with Carolyn Zimmerman (the IRS actuary). She said that this provision is often missed by the IRS reviewers during the determination letter process. She suggested amending the plan to remove this provision. She also suggested using the relief under IRC 7805(b) so it would be allowed to amend this provision prospectively.

[Effen]

This same question was recently posted on the ACOPA Board.  On that board people commented that if the last day worked rule only applied to HCEs, it might be ok.

[Mike Preston]

52 minutes ago, Effen said:

This same question was recently posted on the ACOPA Board.  On that board people commented that if the last day worked rule only applied to HCEs, it might be ok.

I don't think so.