Target Benefit Plan Issues

[chris]

Just ran across a takeover target benefit plan. Prototype doc. is dated some time in 1989. Other than amendment issues I noticed the interest rate set forth in the adoption agreement is 6%. What is the current interest rate (or range) that is ok to be used?

[WDIK]

We don't currently have any target benefit plans, but the prototype document that we used to use required an interest rate between 7.50% and 8.50%.

[Mike Preston]

You can use any rate you want. It is just a matter of whether you have a safe harbor plan under 401(a)(4) once you get done. As pointed out, if you don't use a rate between 7.5% and 8.5% the plan will not automatically pass 401(a)(4) (unless there are no HCE's in the plan).

[chris]

Would it be possible to amend the plan effective with the first day of the 2003 plan year to utilize one of the safe harbor rates? I would think that doing so would only affect the calculation of contributions needed for the 2003 plan year and would not affect prior years which were calculated using the 6% rate? Thanks for the prior responses.

[Kirk Maldonado]

My recollection is that there is some ancient IRS guidance (Revenue Ruling?) that provides a safe harbor for the use of a 6% interest rate factor in a target benefit plan.

[Mike Preston]

I seem to recall that, too. But wouldn't that have been obsoleted by the new 401a4 regulations dealing with safe harbor target benefit plans? I haven't checked those regs today, but I don't recall those regs having a 6% exception.

[AndyH]

Chris, I'll take a stab at your question. You'd be going from a general tested allocation to a safe harbor, and my reading of the regs (and I could be wrong, I am willing to be corrected) is that you would need to separate the old and the new through the use of some "fresh start" approach which I would think would be best done with an amendment. I would think that your cleanest approach would be to start the formula new, i.e. the target would only reference years of participation starting now (future only), i.e. 2% of pay x years of participation starting 1/1/2003. And then I would use no theoretical asset for this new peice, starting as if new. And new (safe harbor) plans must be participation to the best of my recollection.

There could be other ways, but I think this is one of them.