target benefit plan contribution

[Ervin Barham]

I am trying to clean up a mess on a target benefit plan. Document indicates that compensation history is the 10 consecutive compensation periods ending in the current plan year and that the averaging period is the plan year. The averaging period is 5 compensation periods that result in the highest average compensation (consecutive). All of that seems clear enough. However, I cannot follow what the prior actuary used as compensation as the document also references a "fresh start" beginning with the 1996 plan year.

Can someone explain in a clear example (I'm not an actuary) what I'm dealing with here?

Also is there a spreadsheet out there that I can use to check the work? - the spreadsheet I am using and the prior actuary's numbers don't seem to agree, so there probably is something missing from my limited knowledge.

HELP!

Thanks!

Ervin Barham

[AndyH]

I can't help you with the spreadsheet, but I can address the comp issue. I don't see how a "fresh start" would affect average comp. A fresh start I would think is normally a transition period where the plan went from a non-safe harbor design to a safe harbor design, and there may have been a recomputation of the "theoretical asset".

I don't think this would affect average compensation. If a plan is a safe harbor plan, it must base it's contributions on average compensation. So, I'd focus on getting the 10 year comp history and determining which are the highest five consecutive years. That should be the comp used. Just make sure you are applying the correct 401(a)(17) limits, or perhaps more to the point, see if you can prove that the prior administrator did not.

If you want to be specific about what the plan document says about the "fresh start" period, I'll try to help confirm whether or not it is relevant.

Also, you should try to determine whether or not the plan is intended to be a safe harbor. If not, there are several ways that comp used could deviate from average comp per the document. I'd look at the most recent FDL for this issue.

[Mike Preston]

Ervin, have you considered calling the prior actuary and asking him/her?

[Ervin Barham]

Thanks for the replies!

Mike:

Good point, unfortunately the prior actuary is not in the business any longer. If he were, he would be doing this instead of me! Long story...

I do have a meeting with another firm to assist me with this, but the more knowledge I have going in to that meeting will help me to follow the logic and understanding the "why" instead of just punching in numbers.

Thanks.

[Mike Preston]

Well, target benefit calculations are definitely strange. The two decision points that are most critical are: 1) are you dealing with a methodology that was set up before the non-discrimination regs came into effect? 2) Does the plan intend to conform to the safe-harbor target benefit calculations under the regs at any point?

Just from your bried description it sounds like the plan was set up in a way that was inconsistent with the approach that the regulations take and they changed to an approach that is consistent with the regs at some point.

Hence, you might want to reveiw 1.401(a)(4)-8(B)(3) while checking the results from any spreadsheet.

The biggest change from pre-401(a)(4) regs to post-401(a)(4) regs was typically the treatment of the "theoretical reserve" and the required contribution based on that. It used to be common practice to have the theoretical reserve calculated without regard to the 415 limit and then have the required contribution be equal to the sum of the un-contributed theoretical reserve plus the newly calculated contribution. For example, let's say that the first year cost was $33,000 for a given individual, but was limited to $30,000. In the second year the cost would be $3,000 plus the cost determined, assuming the individual had a theoretical reserve of $33,000. The regs don't allow that approach.

Transitioning from the old approach to the new approach was challenging. Of course, your plan may not have had that particular issue, so this may be entirely off point.

Keep in mind that if the plan doesn't follow the regs, the result is merely that the plan's resulting allocation is tested as any other defined contribution plan - under the general test.

[AndyH]

Agreed, but of course the allocations must not contradict the terms of the plan, and if the plan has an FDL which states that it was approved as a safe harbor, then by extension the allocations should probably follow the regs as well.

It seems to me that allocations that violate the terms of the plan may be worse than (or just as bad as) violations due to errors on the part of the prior TPA.