Inputting Permitted Disparity

[nancy]

I am trying to check the results in Relius for a plan that I am testing at Social Security Retirement Age with permitted disparity. I thought you had to use the factors from 401(l) adjusted for SSRA (i.e. .75, .7, .65). Relius tells me that because I am testing at SSRA, all participants should have a factor of .75. (That's what the system is doing) Is this correct?

[AndyH]

No, that is not correct. You are correct. But I don't think we are allowed to test at SSNRA, which is probably related to why your program does not work. This was a gray area for a while, then I think something came out that said it was not acceptable, but I cannot recall off hand what that was. I'm sure somebody else can. But I thought I'd answer your question first.

[Guest DFerrare]

If you are cross-testing a profit sharing plan, the permitted disparity rules for defined benefit plans under 401(l) are used. Under the regulations, the maximum factor is .75 at social security retirement age, which can be age 65, 66 or 67. The factor is reduced for ages less than the SSRA. For example, if a plan is cross-testing use a testing age of 65, the factor is .75 for participants with SSRA=65. The factor is reduced to .70 for SSRA=66 and tesing age 65 and to .65 for SSRA=67 and testing age 65. If the cross-tesing is done with testing age = SSRA, no reduction is necessary since the tesing ages will be 65, 66 or 67. It sounds to me that the program is correct if tesing age = SSRA.

[AndyH]

Yes, I agree. Thanks DFerrare. My pre-coffee Monday morning reponse was less than clear and complete.

But I still would like to make the point that I don't think that you can generally use SSRA as testing age unless SSRA is NRA. And even if SSRA is NRA (I have one such DB plan), I believe that it is still a gray area if that is proper for testing.

For testing a DC plan on a benefits basis, you can either use the 3 tiered rates or you can use one rate (.65% if NRA and TA is 65) for everyone.

[Guest DFerrare]

I agree. I wouldn't try it without a determination letter.

David

[nancy]

Thanks for refreshing my memory. It had been awhile since I had gone through the mechanics of the numbers. Everything seems to be fine.

[Tom Poje]

Andy:

You are correct in your observation. You can not simply 'use SSRA' as testing age, simply because 'the software allows it' as an option. In particular, see the regs

1.401(a)(4)-12 defintions:testing age.

Basically you use normal retirement age.(or 65 if it is not uniform)

Or, put in the words of Larry Deutsch a few years ago,

"I think some people are simply using SSRA, even if the plan has NRA 65"

Now, it is possible, at least from what I have read, that document language could be added to state that for purposes of 401(a)(4) testing that SSRA will be used. But it is also my understanding that at that point you have a BRF issue as well, (or maybe it is simply you have restructured the testing into ages 65, 66 and 67) and generally this would fail since you would have very few NHCEs with SSRA of 65 or even 66.

[AndyH]

Tom, welcome back from vacation. Dug out yet?

Two comments I'd like to make on the SSRA issue. First, Ed Burrows a couple of years ago told an actuary in my office that testing by using SSRA was a gray area. So that muddies the waters somewhat in my opinion.

But also I recall in what I believe was the Conference Committee Report on Tax '86 where the statement was made, and I am paraphrazing from a bad memory " Congress believes that it is appropriate to encourage and allow the use of SSRA". It was a pretty clear comment about intent. I know that such comment and $2 might get you a cup of coffee, but it has stuck with me. If I still had that "Blue Book" I would quote it precisely. I always thought I'd go back to that if I needed it.