AndyH Posted March 11, 2003 Posted March 11, 2003 General tested Floor Offset arrangement provides that Class A participants (almost all HCEs) get a 4.50% x Years of Participation DB accrual and rank and file get .50% x Years of Participation. DB benefits are offset by a large (around 9%) DC contribution. The maximum pension offset is .50% of pay, which in effect means that Class A people get 4%, others 0%. DB plan also provides for a minimum accrual of $40 per year (not per month) x years of participation, maximum 10 years, so a very small pension is paid to all participants. Will this pass 401(a)(26) if Class A is less than 40% of the population, and not more than 50 people?
Guest merlin Posted March 12, 2003 Posted March 12, 2003 Andy, Check out 1.401(a)(26)-5(a)(2)(i). Does this help you? Also, FWIW, at last year's Northeast Region Benefits Conference Paul Shultz alluded to some upcoming guidance on cash balance plans that considered a 0.5% accrual to be "meaningful". I haven't seen it, and cash balance plans aren't floor offset plans, but...
AndyH Posted March 12, 2003 Author Posted March 12, 2003 Right, that gets to the two questions, 1. What is meaningful, and 2. What is meant by "reasonable and uniform basis" for the offsetting allocation? Does this mean that the DC allocations must be a "uniform" percent of pay?
AndyH Posted March 12, 2003 Author Posted March 12, 2003 Merlin, I remember a post here about Schultz' comments, but I haven't been able to find it on a search. If you were part of that discussion, do you recall the approximate time frame?
Guest merlin Posted March 12, 2003 Posted March 12, 2003 Andy, 1.Meaningful? The only time I've done a floor offset with "tiered" benefit formulas I used a minimum benefit of 833.33/month. The plan is still in the Proposal phase, so no determ letter yet. 2.Reasonable and Uniform? Don't know. In my case we had everyone in all 3 plans (mp/ps and db). The allocations in the offsetting plans were comp/comp. Could we have excluded people from the offset going forward? What if the allocation was not prorata? Integrated should qualify as uniform. What about age-wtd or tiered? But that might be self-defeating anyway if you're trying to wind up with your HCEs as the only ones with net benefits. I have an outline on floor offset plans from Norman Levinrad. he doesn't mention the "reasonble and uniform" issue.
Guest merlin Posted March 12, 2003 Posted March 12, 2003 Shultz's comments were made at the IRS Northeast Regional Benefits Conference (the White Plains edition) last June. The thread was started shortly thereafter.
Blinky the 3-eyed Fish Posted March 12, 2003 Posted March 12, 2003 My understanding of the reasonable and uniform basis is it relates to whom is benefiting, not the level of benefits. We have plans with determination letters where the PS plan is cross-tested and the DB plan has a formula that benefits the owner at a higher percentage. "What's in the big salad?" "Big lettuce, big carrots, tomatoes like volleyballs."
Guest merlin Posted March 12, 2003 Posted March 12, 2003 Blinky, Good to know. What about the meaningful benefits issue?
Blinky the 3-eyed Fish Posted March 12, 2003 Posted March 12, 2003 I have followed the .5%, sans other guidance. In one of my typical plans, the owner gets x% and the rest get .5%. In the end all but the owner's benefits are completely offset, but that is still fine according to 1.401(a)(26)-5(2)(i). "What's in the big salad?" "Big lettuce, big carrots, tomatoes like volleyballs."
AndyH Posted March 12, 2003 Author Posted March 12, 2003 Thanks, this is all helpful. In the one I'm looking at, which is a proposal which supposedly duplicates another existing plan's design, the offset is restricted to .50%, resulting in no benefit for the rank and file, but an equal 4% for the chosen few. Does anything smell wrong with that? Actually, it smells wrong;I just can't figure out what if anything is being violated. Blinky, wouldn't that make yours more efficient, limiting the offset to the gross benefit of the staff?
Guest merlin Posted March 12, 2003 Posted March 12, 2003 It sounds like it doesn't meet the requirements to be a safe harbor floor offset, so you have to test on net benefits,which won't pass, so you aggregate with the offsetting plan(s), so you're probably OK. Is that the way it goes, Blinky?
Blinky the 3-eyed Fish Posted March 12, 2003 Posted March 12, 2003 It definitely is not a safe harbor and must be general tested by aggregating the plans. So the real issue is 401(a)(26) and I am not sure that it violates anything. None of my plans limit the offset amount. I suppose the argument could be made that there is a variation of the percentage of the profit sharing contribution being used for the offset. For those that receive a higher contribution, only a fraction of the contribution is effectively used versus those receiving a lower contribution. Honestly, I don't know if there is a problem with that being not considered "uniform and reasonable." "What's in the big salad?" "Big lettuce, big carrots, tomatoes like volleyballs."
AndyH Posted March 13, 2003 Author Posted March 13, 2003 Yeah, agreed. My suggestion makes no sense unless either the DB accruals or the DC is tiered to begin with.
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