Target Benefit Plan- final average compensation for determining contri

[AndyH]

Target contributions for safe harbor plans are based upon benefits that satisfy the fractional accrual rule of 1.411(B)-1(B)(3)(ii)(A).

The fractional accrual benefit definition there is contradictory in terms of whether the benefit is based upon average compensation at the determination date or average compensation at NRD assuming pay remains constant to retirement age.

For someone more than 5 years from retirement age, then, one approach would base contributions on a benefit derived from average compensation, and another approach would use current compensation (i.e. projected average compensation).

Two firms, related to a takeover case, are arguing that different methodologies are correct for plan intended to be a safe harbor.

Was this contradiction addressed in a Q&A somewhere? Is one correct and the other incorrect, or is each approach arguably correct?

[david rigby]

I could be missing something, but I see no contradiction. The plan defines compensation and average compensation. The accrual fraction does not alter those definitions.

[AndyH]

So which approach is correct?

The plan says that contributions are determined in accordance with 1.401(a)(4)-8(B)(3)(iv)©.

And 1.401(a)(4)-8(B)(3)(iv)©(1) says step (1) in determining the required contribution is to

"Determine the employee's fractional rule benefit (within the meaning of 1.411(B)-1(B)(3)(ii)(A)) under the plan's stated benefit formula as if the plan were a defined benefit plan with the same benefit formula"

And 1.411(B)-1(B)(3)(ii)(A) says:

"(A) Fractional rule benefit. The ``fractional rule benefit'' is the

annual benefit commencing at the normal retirement age under the plan to which a participant would be entitled if he continued to earn annually until such normal retirement age the same rate of compensation upon which his normal retirement benefit would be computed. Such rate of compensation shall be computed on the basis of compensation taken into account under the plan (but taking into account average compensation for no more than the 10 years of service immediately preceding the determination). For purposes of this subdivision (A), the normal retirement benefit shall be determined as if the participant had attained normal retirement age on the date any such determination is made."

My point is that in the first sentence it appears that projected average comp is appropriate, but in the last sentence it appears that average comp as of the valuation date is appropriate. And the paranthetical 10 years fits nowhere.

So, if somebody is 15 years away from retirement and is earning $50,000 but has average comp of $40,000, which is used for purposes of the current contribution?

[AndyH]

Maybe I should simplify and re-phrase the question:

Does anybody, or has anybody out there done target benefit calculations for safe harbor target plans? If so, have you determined the target benefit using current compensation or average compensation, and why?