Separate Ben Structure

[David]

We have a plan with 2 HCE's. They are the only employees of the company. One is much younger than the other. In order to meet each participants goals, I'm wondering if using separate benefit formula's would fly? Thanks in advance for any help.

[david rigby]

Perhaps some more information would help.

Ages?

Will the plan and company survive beyond the retirement of the older HCE?

What "goals" do you have in mind?

[David]

HCE1: Age 61, comp = 170,000, desired contr = 75,000.

HCE2: Age 38, comp = 85,000, desired contr = 20,000.

DOH = 1/1/99 for both. Regarding the life of the plan, right now the older HCE thinks he will keep working past 65, what will happen past that depends on the situation at that time.

Generally, we work on fairly straightforward, small size DB plans. We do not have any DB plans with separate benefit formula's for different groups. Although I don't see why this would be a problem in this case with respect to coverage, participation and providing a meaningful benefit, etc., I would like to know what others think.

[AndyH]

David, I think your idea is a pretty good one provided that no NHCEs become eligible, in which case you'd have some complications.

[Guest Keith N]

My understanding is that you can only "discriminate" against NHCEs, so if you don't have any NHCEs you can pretty much do what you want.

You may want to think about a cash balance plan that provides HCE1 $75,000 and HCE2 $20,000. Obviously there is a lot more to this type of design, but conceptually it should work.

I have a number of employers that are comprised entirely of HCE's and we often use this type of design to meet their individual goals.

[Guest merlin]

We had a client several years ago where only onepartner wanted to be in the plan.The other partner waived participation entirely.There were no other participants.The advent of the "two participant" requirement of 401(a)(26) in 1997 negated the waiver, but we suggested that the 2nd partner accrue a nominal benefit of $1/month. Plan counsel said that both partners had to be subject to the same benefit formula. Since their objectives were now diametrically opposed, the plan was terminated.From the earlier posts it looks like we were right after all?

[AndyH]

I think you were both 1/2 right. Under the prior benefit structure requirements, 40% must accrue or have accrued "meaningful" benefits.

So, I think if two separate benefit formulas both provide "meaningful" benefits, you're ok. But, I doubt that $1 would be meaningful.

But, nothing says the benefit structures must be the same.

[AndyH]

Here's an interesting discussion of the 401(a)(26) issues:

http://www.benefitslink.com/cgi-bin/qa.cgi...id=15&mode=read

[Guest Keith N]

How does one go about submitting questions to the "Advanced Plan Design Q&A " and who answers the question?

I'm sure most of you agree that there are some who would vastly disagree with that response. Not as it relates to 401(a)(26), but more to the definition of "meaningful" benefits. I know several actuaries who have been doing quite well lately by designing floor offset plans which completely eliminate any db benefit for the rank-n-file employees. These designs have been fully disclosed to the IRS and have received approval letters.

Maybe I'm being to critical, but I think the person who answered the question was implying that there was something wrong with the "1% to the staff" solution, when in reality, it may be considered conservative to others.

[david rigby]

Try this link to ask a question:

http://www.benefitslink.com/qa_columns/adv...questions.shtml

[AndyH]

There are specific exceptions under 1.401(a)(26)-5(a)(2) for floor offset plans that meet certain requirements.

[Mike Preston]

Keith, I'm pretty sure that Lorraine drafted the response. I saw it when it came out and I don't remember the Reish firm being mentioned at the time. I could be wrong though.

Lorraine could of course clarify things, since she moderates this section of the message boards, too.

The response indicated that 1% was provided in the db plan, without any potential offset. In a floor offset you might have a benefit that is 10 times as big before offset, yet reduced to zero because of the account balance in the offset plan. It is my understanding that one measures the benefit for purposes of the "meaningful" standard before the offset in most cases.

I have heard that floor-offsets that provide 4/10ths of 1% of pay per year of benefit accrual offset by the dc account balance have been known to get approval from the IRS.

mike