cash balance/psp

[mark Scherer]

In order to pass 401(a)(26), can you give one non-highly fully employed participant a greater benefit eventhough it is not the stated formula in the plan?

[Bri]

Well, you can, but you do have to amend the plan up to 9.5 months after the end of the year to provide for the increased benefit.

[CuseFan]

Correct - either apply a plan failsafe that is in place (which must be done if there is one) or do an 11g amendment within 9.5 months of PYE.

[acm_acm]

It would have to be very small DB benefit (< 0.5% of pay per YOS) for the participant to not already be counted as "benefiting" for 401(a)(26) purposes.

I guess it's possible, but if so, it doesn't seem like a DB plan worth having around given the extra expenses of a DB plan.

[CuseFan]

23 hours ago, acm_acm said:

It would have to be very small DB benefit (< 0.5% of pay per YOS) for the participant to not already be counted as "benefiting" for 401(a)(26) purposes.

I guess it's possible, but if so, it doesn't seem like a DB plan worth having around given the extra expenses of a DB plan.

This happens all the time (<0.5% accrual) in CBPs, especially those with a relatively low interest crediting rate. The "worth" is in the large contributions attainable for the business owner(s).

[Nate S]

Who says you're not passing already?  401(a)(26) is subjective, the .5% benchmark isn't formally a safe harbor...

[CuseFan]

12 hours ago, Nate S said:

.5% benchmark isn't formally a safe harbor

True, it is not stated in legislation or regulation, but IRS has taken a fairly hard line approach on that position dating back to the 2002 Paul Shultz memo https://www.irs.gov/pub/irs-tege/memo_060602.pdf

I would not try to dodge that without a very strong facts and circumstances case that a lower accrual rate should be deemed meaningful.

[Nate S]

Aren't IRS memo's wonderful???  See 401(a)(4) intent, employer reversion excise taxes, ROBS, etc.

But back to 401(a)(26), does anyone know why Relius would pass 401(a)(26) with a 11% employer allocation to the DC plan?  I took over a CB/DC combo, the non-HCE's were only getting $500 in the cash balance (not even close to 0.5%!); but once the DC allocation was 11%, Relius gave 401(a)(26) a pass.  The EA(outsourced) hated it, couldn't determine where that came from, but was willing to deal with it since it was a takeover (prior provider also used Relius) & we were responsible for the testing.

[Lou S.]

Depending on the age of participants, the testing age and the interest credit a $500 CB allocation may or may not produce enough with 0.5% accruals to pass 401(a)(26) testing.

I use Relius and I've never seen it add the DC accruals to the 401(a)(26) report so you might want to check with Relius on what it is going on.

Relius will give a report showing both "benefiting under the regs" and "meaningful benefit under IRS guidelines" if you aren't passing 401(a)(26) with enough at 0.5%, I wouldn't want to have that arguement with an IRS auditor though if you rely on the benefiting under the regs and not the IRS audit guidelines.

[Bri]

And of course, it's easier to justify something less than 0.5 if there aren't HCEs getting 10% for themselves.

[Nate S]

2 hours ago, Lou S. said:

Depending on the age of participants, the testing age and the interest credit a $500 CB allocation may or may not produce enough with 0.5% accruals to pass 401(a)(26) testing.

I use Relius and I've never seen it add the DC accruals to the 401(a)(26) report so you might want to check with Relius on what it is going on.

Relius will give a report showing both "benefiting under the regs" and "meaningful benefit under IRS guidelines" if you aren't passing 401(a)(26) with enough at 0.5%, I wouldn't want to have that arguement with an IRS auditor though if you rely on the benefiting under the regs and not the IRS audit guidelines.

As I already noted, no it was not enough to reach .5%

But yes! It was one of those report options, but it didn't pull it in unless the DC allocation was at least 11%.

Wait, why can't I rely on the regulations when arguing with the IRS???  It seems like that and the law would be my two best sources!

[Lou S.]

2 minutes ago, Nate S said:

As I already noted, no it was not enough to reach .5%

But yes! It was one of those report options, but it didn't pull it in unless the DC allocation was at least 11%.

Wait, why can't I rely on the regulations when arguing with the IRS???  It seems like that and the law would be my two best sources!

I've not seen the 11% issue so can't comment.

I and other practitioners agree we should be able to rely on the regs, that said I don't want be the test case to push that in tax court.

[Peter Gulia]

The linked-to memo, addressed to some IRS employees, describes a line-drawing about circumstances in which “the questions of whether the plan provides meaningful benefits and whether the plan exists primarily to benefit shareholders should be raised when reviewing determination[-]letter applications.”

Also, the memo’s context assumed “a newly established defined benefit plan [for which] there are no prior rates of accrual under the plan with which to compare current benefit accruals.”

Might a practitioner’s analysis be somewhat different for an ongoing plan that is a few years out from its first year?

[C. B. Zeller]

In the event of an IRS examination of a plan, the goal of any service provider should be to get the audit closed as quickly as possible with minimal penalties assessed to the plan sponsor. If one of my clients' plans were audited, I might be able to explain to the agent why a benefit accrual of less than 0.5% should be considered meaningful, and they might even accept that explanation. However, even if they do eventually accept it, it is almost certainly going to cause the audit to take longer, as the agent may have to consult with their supervisor or actuary. To avoid putting my clients in that situation, I would recommend that they use the 0.5% standard as outlined in the Shultz memo.