Prior DB related problem

[flosfur]

Background:

Under a previously terminated DB plan, owner employee had 10 yrs of participation and $5,000 accrued benefit payable at age 65.

A new DB plan is being setup. Owner’s Hi 3 average is well in excess of $205k.

For S415 purposes, the prior DB’s participation and accrued benefit is taken into account.

Thus in 2004, for S415 he would have 11 years of participation (10 yrs in the prior DB and 1 yr in the current DB) and his S415 projected and accrued benefit will be $8,750 (13,750 less 5,000).

At NRA he would have 30 yrs of service with 24 yrs of accrued service @ 12/31/04.

Want to use non-safe harbor benefit formulas in the new DB.

Formula for the owner is X% of average comp reduced for service less than 25 years. Accrual fraction is based on service.

His projected and accrued benefits would be $8,750 (limited by S415) and $7,000 respectively, creating a huge PVAB and unfunded PVAB. Based on the Accrued-To-Date testing method, his accrual rate will be 1.71% [= 7,000*12/(205,000*24)].

To pass the test, the NHCEs’ accrued benefits would have to be increased substantially, further increasing the PVABs and unfunded PVABs.

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If there was “no prior DB plan”, we could have the following results for the owner:

Projected and accrued benefit would be $13,750 and 1,375 (1/10th of projected) resulting in much lower PVAB.

His accrual rate under the Accrued-To-Date would be only 0.335% and would need very low accrued benefits for the NHCEs to pass the general test.

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Any solution to the dilemma created by a prior DB?

[Blinky the 3-eyed Fish]

First, have you looked at whether or not the granting of past service in the benefit formula above 5 years is not discriminatory and if so, how did you come to that conclusion?

[flosfur]

It is not a safe harbor plan. I know you don't agree that one can use all past service even for a non-safe harbor but for this example, assume it is permissible.

Or change the scenario and limit PS to 5 yrs. In that case at the end of first year of the new DB, accrual fraction will be 6/12 giving an accrued benefit of 6/12*8,750 = $4,375, still a huge accrued benefit and PVAB after 1 YOP.

If there was no prior DB, no matter how large the accrual fraction, the accrued benefit after 1 YOP cannot exceed 1/10th of the $Max.

The essence of the problem is that if there is a prior DB issue, any accrual fraction > 1/10th creates a problem.