1.401(a)(4)-8(b)(2)(ii)(B) Normalization to Determine Equivalent Accru

[Guest crosseyedtester]

1.401(a)(4)-8(B)(2)(ii)(B) says:

(B) Normalization

The account balances determined under paragraph (B)(2)(ii)(A) of this section are normalized by treating them as single-sum benefits that are immediately and unconditionally payable to the employee. A standard interest rate, and a straight life annuity factor that is based on the same or a different standard interest rate and on a standard mortality table, must be used in normalizing these benefits. In addition, no mortality may be assumed prior to the employee's testing age.

My understanding is that to run this test, the employer contribution (account balance) is divided by the mortality factor at that age.

For example, a contribution of $5,000.00 is divided by factor UP84@8.5% for age 43 10/12 deferred to age 65, or 1.0780, to get 4,638.22. This amount is then divided by the Compensation to get the equivalent accrual rate.

The equivalent accrual rate for each participant is then the percentages used to run the average benefit ratio test.

Is anyone able to confirm that this is the right approach?

Once doing this, is it then necessary to also run the cross-testing where the contribution amounts are projected forward to NRD? In the case of the data I'm working with, this is a tougher test which requires a lower HCE contribution rate to pass. The results are different due to not counting mortality until age 65.

It happens, that in addition to this, running the 410(B) test by rate groups is even tougher with this data, requiring an even lower percentage for the HCE.

Thank you very much for any advice.

[Guest trish]

Originally posted by crosseyedtester

1.401(a)(4)-8(B)(2)(ii)(B)  says:

(B)  Normalization

The account balances determined under paragraph (B)(2)(ii)(A) of this section are normalized by treating them as single-sum benefits that are immediately and unconditionally payable to the employee.  A standard interest rate, and a straight life annuity factor that is based on the same or a different standard interest rate and on a standard mortality table, must be used in normalizing these benefits. In addition, no mortality may be assumed prior to the employee's testing age.

My understanding is that to run this test, the employer contribution (account balance) is divided by the mortality factor at that age.  

For example, a contribution of $5,000.00 is divided by factor UP84@8.5% for age 43 10/12 deferred to age 65, or 1.0780, to get 4,638.22.  This amount is then divided by the Compensation to get the equivalent accrual rate.

The equivalent accrual rate for each participant is then the percentages used to run the average benefit ratio test.

Is anyone able to confirm that this is the right approach? YES

Once doing this, is it then necessary to also run the cross-testing where the contribution amounts are projected forward to NRD?  In the case of the data I'm working with, this is a tougher test which requires a lower HCE contribution rate to pass.  The results are different due to not counting mortality until age 65. NO

It happens, that in addition to this, running the 410(B) test by rate groups is even tougher with this data, requiring an even lower percentage for the HCE.

Thank you very much for any advice.

[Tom Poje]

lets see what we have;

Retirement age = 65

current age = 43

contribution = $5,000

If you put this money in the bank at 8.5% interest, what would it grow to?

well, the person has 22 years until retirement. (ok, maybe you want to say he has 21 years, but this is only an example)

anyway, at age 65, this amount will grow to

$5,000 * 1.085 ^ 22 = 30,090

The APR factor at 65 for UP1984 at 8.5% is 95.38,

so the individual would receive a monthly annuity of

30,090 / 95.38 = 315.48

annualizing this figure you get

315.48 * 12 = 3785

you divide this by comepenstaion to determine the E-Bar.

hence you ahve taken the contribution and turned it into an Equivalent Benefit Accrual Rate, which is what E-Bar stand for.

[katieinny]

Tom: I'm trying to determine the EBR for participants in an age weighted safe harbor 401(k) plan. This is my maiden voyage, so I've been looking for examples similar to the one you've spelled out above. I'm having trouble with the line $5,000 * 1.085 ^ 22 = 30,090. I believe 1.085 is the factor used to represent the interest (8.5%). But what does the symbol "^" mean in order to get 30,090?

[pmacduff]

1.085 "to the 22nd power", right Tom?

[Tom Poje]

correct.

I always wanted to write the Idiots guide to the calculation, so look at it this way.

ee receives a contribution of 5000.

in one year, at 8.5% interest it will grow to

5000 * 1.085

in two years it acrues another year of interest, so

5000 * 1.085 * 1.085 or

5000 * 1.085^2 or 1.085 squared

etc, etc, etc,

guess I can be pretty dull....

[Guest Rosemary Raymer]

Tom, that was the best EBAR explanation I have ever seen!

[Guest SPOT]

how is the APR factor at 65 for UP1984 at 8.5% is 95.38 determined? I have a UP-84 table, at age 43, it has a rate of .002818. I have a big mental block going on here and I don't know how the get to the 95.38.

help!!!!!

[Blinky the 3-eyed Fish]

Spot, you are looking at the d(43), which is the probability of dying in that year. What you need is the purchase rate at age 65, which is the present value of $1 payable monthly until death. They are two completely separate components of the mortality table, akin to looking at the engine when you just want to know what kind of car it is.

[WDIK]

Blinky:

Isn't the probability of dying in year x q(x) rather than d(x)?

[Guest SPOT]

Pardon my ignorance, but how do you calculate the PV of $1 payable monthly until death? Is there a table published? Do most people write a formula in excel? Please be patient with me, I'm a beginner.

[Blinky the 3-eyed Fish]

WDIK, you are correct. I posted without thinking. dx would be the total dead in the year.

Spot, it's far too complicated to explain here. See your local actuary. The tables might be published on the Society of Actuaries website.