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May I count YOS for accrual purposes?


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Hi 

I am never comfortable with providing prior service for the following situation but there are different schools of thoughts out there.

Working on a new DB plan. Have employees and the owner as eligible. I am now told that the owner's spouse have been working for the company and never drew a salary. He has been employed since 2000.

Assuming that he always worked 1000 hours, any issues in providing 1 to 5 past YOS (have not totally determined yet on how many years I will need for the plan design) for benefit accruals (under safe harbor rules)? I believe, the lack of salary history will be of an issue especially for 415 and testing but let's put that aside for the time being. I just need to determine if I can provide prior service.

Thank you

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As you note, you have zero average compensation for 415 purposes and where is the evidence of actual service? If it was an owner (not by attribution) who did not have net compensation because expenses exceeded revenue (but owner generated revenue) then I could see counting service. But if I'm an IRS agent looking at this, I'm thinking either the spouse was volunteering (and so not an employee) or maybe getting paid under the table, which opens all sorts of other scrutiny.

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If the service is legit, it can be used. If you meant safe-harbor in the sense of crediting up to 5 past years of service for benefit formula purposes, that is fine.  If you meant you are limiting past service to five years so you don't lose reliance of the use of a safe harbor formula then I'd double check the design against a more modern construct.

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Thank you for your response. My question was more of a theoretical on the 5 past service for safe harbor. As to the service being legit, it is the plan sponsor's burden to prove. I am not sure you meant by a more modern construct.

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It was an either / or situation. You have identified the fact that you were the first situation so the second situation doesn't need to be discussed.

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  • 3 weeks later...

Mike would know if the thinking has changed, but one thing that has stuck with me for many years was when Jim Holland said at a conference years ago something like

"No compensation?  Not in the test.  ANY test".  

So that's my rule.

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AndyH, are you commenting on what the OP said to put aside for now? :-)  If you are, I don't think that Jim had the 5 year safe harbor regarding past service in mind as a "test" which excludes the owner if compensation is zero but hours worked is substantiated.

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I agree with your skepticism and it is the plan sponsor's burden to prove the validity of prior service. Anyway, my issue was just resolved when they decided to make the DOH effective with the plan year. Good conversation and thank you all.

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