General Tested Plans and "Fresh Start" rules

[AndyH]

I have a DB plan which used to be a safe harbor until an amendment was added affecting one (HCE) person only. It was an addition to his accrued benefit, simply $x per month was added to his accrued benefit.

This QSERP feature was designed to pass the general test. In fact we did the general test and it passed.

The affected person is at NRA and will still be employed on a part time basis while collecting his pension.

My question is: Is there any way to avoid the general test in the future? Is this a candidate for the "Fresh Start" rules in 401(a)(4)? Is anybody out there fluent in these rules?

I think there are three possibilities:

1. The plan is forever subject to the general test.

2. The plan is subject to the general test only until the person affected by the non-safe harbor provision is excludable from testing.

3. Item #2 is true, but only if the plan is amended to an (a) plus (B) formula, with (B) being a safe harbor. Then, the fresh start rules seem to be available, although this makes little sense to me.

Or, and I guess this is #4, the plan is amended to (a) + (B) and it doesn't matter whether the person in question is included or excluded from testing.

Any help would be appreciated.

[Guest merlin]

I think you're in the test until you do something to get the plan back into a safe harbor by its terms.But if he's only working parttime does that mean that he won't be accruing any additional benefits due to increased service/comp, only actuarial increases? If so,does 1.401(a)(4)-3(f)(3) give you any help on the test until you can do something to get out of it?

[AndyH]

Thanks for the comments, Merlin. Passing the test isn't the problem; I don't think the client benefits from doing the test on an ongoing basis, since the one affected person will not experience an increase in his accrued benefit in the future. He will have no further average comp or service increase.

And it's a large plan so it's a lot of work. Thank goodness for the three year testing cycle.

But, I'm still hoping there must be some way to put this back into safe harbor testing status.

[Guest merlin]

What's wrong with your item #3? My less-than-rudimentary understanding of the fresh start rules says that you can ignore benefits accrued before the fresh-start date. Why can't you amend the plan back to its pre-QSERP safe harbor formula and go on from there? "For a safe harbor plan, this means the plan is a safe harbor plan even though benefits accrued before the fresh-start date would not meet such requirements." Per the ERISA Outline Book and 1.401(a)(4)-3(B)(6)(vii).

Any help here?

[AndyH]

Well, I guess that was my question. If I complete an amendment which accomplishes nothing, have I put it back as a safe harbor, or does that simply mean I can ignore pre-fresh start numbers in the general test, i.e. if using accrued to date method, use accrued to date starting at fresh start date.

Or, does it mean that I don't have to do the general test at all?

Example.

Plan provides benefit of 1.5% x av comp x YOS.

Plan amended in 2000 to provide 1.5% x av comp x YOS, PLUS a benefit, if any, from Appendix A, which lists one person and $5,000 per month (hypothetical amount).

Only person affected by Appendix A semi-retires in 2001. Plan general tested in 2001 and passes.

If I amend plan in 2002 to provide for formula of C+D, where C is the accrued benefit as of 12/31/2001 (maybe indexed for comp changes), and D is 1.5% x (YOS 1/1/2002)+ x Av Comp, I seem to have created a fresh start date of 12/31/2001, and affected nobody's benefit. Have I avoided future general tests?

[Guest merlin]

I have to admit I had the same thought: Do I have a safe harbor plan that I don't have to test ,or a plan that I have to test and the test is automatically passed? Sound like another one of those medieval theological discussions that we can fall into so easily on this stuff.Oh, I forgot.Theological discussions are unconstitutional,so we'll have to wing it.Here goes:

You've got a frozen portion that satisfies -13© and -3(B)(6)(vii). Your fresh-start portion is a safe harbor formula. I'm reading it to mean you've gone back to safe harbor status,therefore no testing. But I'd like somebody else to weigh in. Paging Dr. Preston.

[AndyH]

I still don't have a conclusive answer to this matter. Anyone else care to express an opinion?

[Mike Preston]

I'm in agreement with Merlin. As long as you have a unit credit formula, it seems to work. If you were accruing fractionally, the creation of a safe-harbor after a frest-start date is subject to different opinions. I think it satisifes the rules. Some (maybe most) at the IRS disagree.

But since your formula is unit credit, it seems pretty clear to me that the rules of -13© apply and that the resulting benefit accruals after the fresh start date are eligible for safe-harbor status.

[AndyH]

Yes, re-reading those sections now I agree. It would seem that I would need an amendment. And the amendment would be a formula with Wear-away under 401(a)(4)-13©(3)(4)(ii) to achieve my objective of not affecting anyone's benefit. Now this is beginning to make some sense.

Thank you both for your help.