Target Benefit with Beginning of Year Val Date

[AndyH]

Takeover calendar year target benefit plan has a 1/1 valuation date. It seems to arguable violate everything from 412 to 404 and 415, but prior (international) firm maintains everything is ok. Everything from benefit statements to plan documentation is cleverly worded to make due dates ambiguous.

Very strange. Anybody run across one of these or is this the only such creature?

[Mike Preston]

I've never seen one, but it doesn't strike me as all that problematic. Consider it a money purchase plan wih an allocation date of 1/1. Can it be done? Sure. Should the 415 limits be applied on a limitation year basis? Yes. Does that create administrative issues up the ying-yang? You bet.

Just because the international firm says that everything is ok doesn't mean that everything is ok. Did they allocate in years past amounts that exceeded 25% of 415 compensation paid during the limitation year? I hope not.

[AndyH]

Thanks for the comments, Mike.

Yes, I agree; all is not ok. Here's a little of the weirdness. First, I need to correct myself on the plan year.

Plan year ends 10/31. Participants eligible by 11/1/2002, for example, receive a statement of account which includes "10/31/2002 balance", plus "11/1/2002 contribution".

The 11/1/2002 contribution is based upon pay for prior PYE 10/31. But client (and document) say that the "11/1/2002 contribution" is for 11/1/2002-10/31/2003 and is due by 7/15/2004.

Is this ok? Doesn't sit right with me. This has been going on for more than 10 years and the annual contribution approaches $500,000. And, yes, the client has an attorney involved who shares the same concerns.

[Mike Preston]

What is the limitation year, and how is 415 compensation defined for purposes of the limitation year? Those are the determining factors.

[AndyH]

Well, that is logical but I don't think it helps. The limitation year is 11/1-10/31.

"Section 415 Compensation" is defined, but it is just a normal definition, without specificity of which period.

There is a section "Maximum Additions" which is normal 415 language, referencing 25% of "Section 415" compensation. The end of the "Maximum Additions" paragraph contains the following

"This section shall be administered in accordance with Code Section 415©, which is incorporated by reference."

So maybe the document intends that a preliminary contribution be determined as of November 1, but that is subject to a recomputed 415 limit for the 12 month period beginning 11/1?. I guess that is the only way this could work. But we don't think that such adjustment has been done in practice. If it were, a participant could get a benefit statement touting their November 1 contribution, then terminate 11/2 and get restricted to 25% of one or two day's pay. Sounds like a cutback to me.

Otherwise, the 11/1 date has the same effect as a 10/31 calculation except that minimum funding is extended a full year.

[Mike Preston]

I don't disagree with you. I haven't found anything yet that allows the 11/1 contribution to be defined with respect to compensation for a period other than the current limitation year. There is that provision at the end of the reg that allows the commissioner to extend other definitions of compensation to Section 415 so a full search would need to be done before ruling out what was done entirely. Have you asked the prior firm to tell you their specific rationale?

[Belgarath]

I have seen a couple of BOY target plans, but they weren't set up the way you decribe. The limitation year had an overlap, to avoid some of the problems you mention. So although the plan year might be 1-1-03 to 12-31-03, the limitation year would be 1-2-02 to 1-1-03. I'm not sure how a plan such as you describe could be justified - I can't see a way to do it, at least.