Accrued benefit in 412(i) plan as part of a combo arrangement

[Guest ActuaryWannabe]

I have a highly compensated participant who wants to terminate employment. From what I can gather from the 401(a)(4) test that was provided to us by the prior administrator, the accrued benefit used in the general test is the "formula" accrued benefit.

The cash surrender value of the annuity policy for this individual is significantly greater than the present value of the formula accrued benefit. Is there any way the policy can be distributed without a discrimination issue? Does the "increase" between the benefit used for testing last year, and the amount actually distributed this year, have to be recognized in the current year's testing?

[AndyH]

What is the "testing" to which you refer and why was it required? What feature made that test necessary.

I think if you figure that out then you'll approach the answer to your question. A safe harbor plan does not ordinarily need 401(a)(4) testing. If it is not a safe harbor plan, then you should determine why not. It may not qualify as a 412(i) plan in which case the answer to your discrimination issue question might be NO.

[Guest ActuaryWannabe]

AndyH,

You probably missed from the subject line that this is part of a combo plan. Thus general testing was required. Does that clarify?

[AndyH]

Yes, sorry, I missed that.

To me, that makes it less likely that it is a 412(i) plan. I'm sure some of us will explore it if you wish to detail the provisions. There is some question of whether a general tested 412(i) is a 412(i). I don't think we'll resolve that here but it might make for some interesting discussion. Jim Holland said at ASPA National in either 2002 or 2003 that if it needs a corrective amendment (i.e. failure of general test) then it is probably not a 412(i). Now that is not specific, but still.

But the plan you reference may have features that make it not satisfy IRC 412(i), so if you wish to pursue it perhaps you could elaborate on the design. There are many here more knowledgeable about 412(i) plans than me, but I have trouble understanding how a 412(i)/DC could pass muster because of the accrual rules for one thing.