Regular Intervals and Smooth Increases

[perkinsran]

It appears the following bands will satisfy the "regular intervals and smooth increases" tests under the final regulations.

<3 years of service .6% Contrib

3 to 5 yrs 1.2%

6 to 8 yrs 2.4%

9 to 11 yrs 4.8%

12 to 14 yrs 9.6%

15+ years 14.6 %

Obviously the owner is the only one with 15+ years. Does anyone see anything wrong with using this formula? Thanks.

[AndyH]

I'll comment since nobody else has.

I haven't worked with this much, but at a glance it might be ok in terms of avoiding the gateway. But you still need to test. How are you going to pass the general test? I would think that the demographic would need to be unusual.

[Mike Preston]

If this plan is top-heavy, the 0.6% rate will fail the requirement found in 1.401(a)(4)-8(b)(1)(iv)(D)(1).

[AndyH]

I don't see that subsection. Is the cite correct?

[Mike Preston]

Maybe not. It is deeply buried and I might have read it wrong. But it seems right to me. 1.401(a)(4)-8(b)(1)(iv)(D) is entitled: "Minimum allocation rates permitted." and (1) is a few lines lower, but doesn't have a title.

[Tom Poje]

cite looks correct. the requirement is that the minimum band is 1% (not .6% as desired in the question)

[AndyH]

Got it-finally. Thanks. Buried is right. Agreed on the need for 1% if top heavy.

[perkinsran]

Thanks so much. This is a fairly unusual situation. The company has about 50 eligibles, but the onwer is the only one with 15+ years of service and there is only one employee in the next band. There are also 5-6 other HCEs who are in the lower bands. We obvioulsy fail coverage in the rate bands but we pass a4 general tests.

We also have not used this concept but it seemed to work well for this company, since the overhelming majority of employees fell in the first two bands. and thereby we only had to contribute 1.2% or lower instead of the 5% gateway.

Regarding Top Heavy--Although the plan is not top heavy they are very close and we assumed a minimum 3% would have to be provided for all bands less than 3%. How could you avoid top heavy minimums if you only provided the 1%?

[Mike Preston]

What does "We obviously fail coverage in the rate bands" mean?

Also, I don't understand your last paragraph. If the plan is top heavy you have to provide a 3% minimum. If it isn't, you don't. If you don't, then the lowest band can be less than 1%. If you do, then if the lowest band is less than 1% you fail.

[Tom Poje]

if lowest band < 1% and plan is top heavy, then you can't use 'smooth increses' to avoid gateway minimum.

in otherwords, since HCE received 14.6%, you have to provide gateway minimum 4.87% (1/3 the rate of the HCE)

it looks like the govt logic is as follows.

you can use 'smooth increases' to favor the HCEs, which, just by its nature will probably cause the plan to be top heavy. that is fine, and you can still get by providing the 3%.

But since you were really obnixous and provided only .6% to the lowest group, then you have to provide the gateway minimum rather than relying on smooth increases

[AndyH]

Now I'm confused. Tom, your last sentence lost me.

perkinsran, you are passing the general test because you have younger employees that have a higher EBAR than the owner with 15 YOS, right?

If that is what is happening, this design looks like a pretty good idea to me with enough people to make it not top heavy. Might be something that would work with a nonprofit with some HCEs.

[Tom Poje]

I finally confused Andy? Wow.

before one can cross test, one has to either provide the gateway minimum (1/3 rate or 5%) or provide smoothly increasing schedule.

but the caveat on the smoothly increasing intervals is that you can't have a rate less than 1% -or at least that is the way I read the long winded cite

[AndyH]

Isn't Mike saying that if the plan is not top heavy, then 1% is not needed?

And aren't you saying that 1% is needed either way?

I don't know what that language says. I thought I did but now I don't.

The cite is too painful to read (not to mention find!) so I was hoping one of you can explain it so I didn't have to read it again! How much of our tax dollars were spent devising that provision?!!

[Mike Preston]

Boy, the word entropy comes to mind.

Tom stated it right at the beginning of his post, in that the plan had to be top-heavy for the schedule indicated to be invalid as far as avoiding gateway.

The end of Tom's post didn't reverse that, but was trying to decode the IRC's intent as to why such a schedule didn't work if the plan was top-heavy.

Andy, I'm saying that if the plan is not top-heavy, it works fine. If the plan is top-heavy, then the gateway is not satisfied.

[jquazza]

If you're writing this formula in the document, you running the risk of having to meet gateway minimums when (if) the plan becomes top heavy. Otherwise, I like it (I like it a lot! as my Australian buddy would say: It's a BeauOOt!)

[perkinsran]

Boy, I step out for a few days and everybody gets in the fray Thanks for your input.

To finish off this post, in answer to Andy (I think), yes the EBARs of the NHCE is considerably higher due to the age of the owner (58) compared to a relatively young employee population. Also, there are some other older HCEs that have short service and therefore have low EBARs. This should be reflective of the old days if the plan wasn't top heavy and we wanted to max benefits for older owners (before the gateway.)

I think I agree if the plan becomes top heavy, the formula will not work since the minimum % rate must be 1%. (1.401(a)(4)-8(b)(iv)(D)). In that case, I think you could use 1% as the minimum "hypothetical" rate to prove smooth increases and then override it with the 3% TH minimum.

Finally the plan document does not provide the formula, just the service bands.

[Mike Preston]

If the plan document does not provide the formula, then it doesn't satisfy the gateway, even if the resulting allocations would satisfy the gateway had it been written into the plan.

[Tom Poje]

so increase your age bands by 1 year, and eliminate the lowest rate

<4 1.2%

4 to 7 yrs 2.4%

8 to 11 yrs 4.8%

12 to 15 yrs 9.6%

16+ years 14.6 %

original suggestion

< 3 .6%

3 to 5 yrs 1.2%

6 to 8 yrs 2.4%

9 to 11 yrs 4.8%

12 to 14 yrs 9.6%

15+ years 14.6 %

I'd find it hard to believe the overall cost would change dramatically.

maybe the first year if owner is at 15 years, but the following year owner would be at the new level.

[AndyH]

Merriam-Webster online dictionary:

entropy: 1 : a measure of the unavailable energy in a closed thermodynamic system that is also usually considered to be a measure of the system's disorder and that is a property of the system's state and is related to it in such a manner that a reversible change in heat in the system produces a change in the measure which varies directly with the heat change and inversely with the absolute temperature at which the change takes place; broadly : the degree of disorder or uncertainty in a system

And that came to mind? What kind of mind does that come to!

But this word did describe the state this thread at the time.