Accrual to date Method

[perkinsran]

I am converting a straight PS to a Cross tested Plan. The PS has been actively funded since 1986 at about 15% of pay. The owner is about 50 and two NHCE are also about the same age. When we ran the a(4) test using Annual method, the plan would only support a small increase for the owner. Since the two NHCEs have less service than the owner, we wanted to use the Accrued to date method. Three questions:

1. Regs say to include years the employee benefited. For HCE, I assume we use 15 years (1986-2001) or must we only use years for the cross tested plan effective date? (The plan is being amended)

2. If plan recognizes services before inception date, are you still restricted to limit the denominator years to inception date ("benefiting" service forward?

3. If the plan had several years in which it were not funded, can you still count those years?

[Tom Poje]

Never have done accrued to date, and had to dig back through some old notes to find the following (just so I don't say something wrong):

talk #26 1998 ASPA conference

"Accrued to date method is very useful when a PS plan is being converted to a cross tested plan, or any other situation where the disparity between the HCE and NHCE contribution rates is significantly narrower than it will be in a cross-tested plan."

so, for your q 1, you can include all years.

if plan wasn't funded (assuming there are no forfeitures) then you would not be able to count those years.

example given:

'plan effective 1/1/92 cross tested first performed for 1998.

Last day of measurement period is 12/31/98.

first day of measurement period can be any of 1/1/98, 1/1/97, etc."

(Begininning of measurement period can be modified to not include all prior years under fresh start rules - but then you can only include earnings based on the contributions from the fresh start date -have fun calculating that number!!!!-ok, those are my hand scrawled comments in the margin)

"you can not use current compensation in your calculation"

[AndyH]

These are good questions. I think I just found the/an answer.

I have IRS Publication "Employee Benefits Plans Explanation No. 5C Coverage and Nondiscrimination Requirements: General Tests and Average Benefits Tests". It appears to be an internal guide to reviewing such test by IRS personnel.

Page 9 "Normal Accrual rate-divide the increase in the accrued benefit (within the meaning of 411(a)(7)(A)(i) during the "measurement period" by the employee's "testing service" during the measurement period. (These terms are defined below.)"

Page 11 reads in part:

"Testing Service, for purposes of determining accrual rates, generally means the employee's years of service as defined for purposes of the plan's benefit formula. Alternatively, testing service can be service determined for all employees in a reasonable manner. An example of a reasonable alternative definition of testing service is the number of years the employee has benefited under the plan."

It goes on to read, "

Whatever definition of testing service the employer uses ......., that definition must credite employees with testing service for any year in which the employee benefits under the plan ....."

In another section, it references an acceptable alternative testing service definition as in Part VI of Worksheet 5 or Part VII of Worksheet 5A which I don't have. Maybe somebody can find those on the IRS' web site.

The above section seems to refer to both (a)(4) (1) (DB testing) and (a)(4)-2©(2) which is DC general testing. I must caviat this, however, that further along in a section on cross tested plans the following statement is made:

"An equivalent accrual rate is determined as follows. ........Next the employer must determine the increase in the employee's account balance during the measurement period and divide this by the number of years in which the employee benefited under the plan during the measurement period......."

So, that seems more restrictive, but I'd put more stock in the first section which basically allows any reasonable method of determining testing service.

[AndyH]

Tom, I just found the outline that your notes must have come from. And it does say that Testing service is "Service which represents the period in which the deemed allocation is earned and in which the employee benefitted under the plan."

But again there's ambiguity because it does not define "benefitted". I'm not sure that it necessarily is the 410(B) definition. I wonder about years of just investment earnings.