Maximum Permitted Disparity

[Guest pension222]

I just took over a defined benefit plan with a benefit formula of [1.3% average annual comp + .58% (average annual comp - $10,000)] multiplied by total years of service.

The normal retirement age is 65 and the normal form is 10C&C.

Some of the participants will have 40+ years of service to apply to this benefit formula.

IRC 401(l)(A)(4) defines the maximum excess allowance as .75% x years of service not in excess of 35.

Reg. 1.401(l)-5©(1)(i) stipulates that the cumulative disparity limits is satisfied if an employee's cumulative disparity fraction does not exceed 35.

Must the years of service applied to the excess portion be limited to 35?

If not then consider this:

For somene who enters the plan after 12/31/88 with a maximum excess allowance of .65 (SSRA = 67) his annual disparity fraction would be .58/.65 = .89, so it appears that he could have 39 years of service applied to his excess portion (.89 x 39 = 34.71. Is this correct?

For somene who enters the plan after 12/31/88 with a maximum excess allowance of .75 (SSRA = 65) her annual disparity fraction would be .58/.75 = .77, so it appears that she could have up to 45 years of service applied to her excess portion (.77 x 45 = 34.65. Is this correct?

And finally, is there a statutory reduction to the maximum excess allowance due to the fact that the normal form is 10C&C or the integration level is a flat $10,000?

[MGB]

You only need to meet the maximum disparity rules if you want to ignore the general 401(a)(4) test. You can have any structure as long as it is general tested.

[Guest pension222]

Assuming that I do not want to general test the plan, can someone shed some light on my question?

[david rigby]

In your first example, the maximum permitted disparity is 22.75% (.65 x 35) I'm not sure that you have to use plan language to limit to 39 years, as long as plan language that limits to 22.75%.

Before we analyze your second example, are you sure there are any employees who have .75% ?

There is no statutory adjustment for the 10cc form of payment. I can find no regulatory adjustment explicitly defined. See IRS Reg. 1.401(l)-(3)(B)(4)(iii)(B):

"(B) Level Annuity Forms.

In the case of an optional form of benefit payable as a level annuity over a period of not less than the life of the employee, the optional form must satisfy the maximum permitted disparity requirement of this paragraph (B). Thus, for example, if the form of a defined benefit plan's normal retirement benefit is an annuity for life with a 10-year certain feature and the plan permits employees to elect an optional form of benefit in the form of a straight life annuity, the plan must satisfy the maximum disparity requirement of this paragraph (B) with respect to each of the optional forms of benefit. An annuity that decreases only after the death of the employee, or that decreases only after the death of either the employee or the joint annuitant, is considered a level annuity for purposes of this paragraph (B)."

[Guest pension222]

Dear Pax:

Thanks for the response.

No, I do not have any actualy participants with SSRA of 65 but included this for pedagogical purposes only.

I agree with your analysis but honestly have never seen a DB plan formula that did not use the maximum excess allowance and did not limit years of benefit service for the excess portion of the benefit to 35 years (or less). I asked the question to make sure I understood this correctly, that the years of service for the excess portion of the benefit do not need to be limited to 35, one just needs to make sure that the overall disparity limit of 1.401(l)-5 is not exceeded.

I also did not find anything that would cause a reduction in the maximum excess allowance due to 10C&C but the document I am working with stipulates reductions for any form other than life. For example, it stipulates the reduction factor for 10C&C to be .91 and I was wondering if I was missing something.

Thanks again.