133-1/3 Rule and New Comparability

[Randy Watson]

Does anyone have an opinion on whether a db plan would violate the 133-1/3 rule under the following circumstances?

The db plan is a cross tested plan that provides benefits based on employee classifications....Class A, Class B and Class C. Assume that Class A provides a benefit that is more than 133-1/3 percent of the benefit under Class B and the Class B benefit is more than 133-1/3 of the Class C benefit.

With no other facts, it appears as though this would clearly violate the 133-1/3 rule. However, there is no natural progression between classes, meaning a participant does not necessarily start out as a member of Class C and then move up to B and then A. For example, an individual may start out in Class A. Likewise, an individual may start in Class B and never move to Class A.

The purpose of the classifications is not to evade the vesting rules by backloading. However, it may appear as though backloading is taking place since individuals may move between classes.

Any theories or opinions would be greatly appreciated. Thanks!

[AndyH]

If each of your classes can separately pass coverage then I think you are ok.

[Randy Watson]

Thanks, AndyH. Please tell me why you think we're okay.

[AndyH]

1.401(a)(4)-9©.

All the facts in your case are not stated, but if for example you had three hourly people receiving 10% of pay, three salaried people receiving 20% of pay, and three others at a separare location receiving 30% of pay, and each group had one HCE and 3 NHCEs then you can restructure the plan into three subplans, each with a ratio/percentage of 100%, each with a safe harbor formula (presumably). Since each subplan is ok and each pass coverage separately then the plan as a whole satisfies 410(b) and 401(a)(4).

Now you cite an issue with the accrual rules but you were not specific. That is why I caviated my comments.

In other words, each of your sub-plans must satisfy the accrual rules as if they were stand alone plans.

[Randy Watson]

I like your analysis a lot.

I understand that each class would be a subplan for discrimination purposes, but what authority gives me the ability to treat each class as a subplan for purposes of the accrual rules?

In addition, won't we violate the 133-1/3 rule if a person moves up in class?

[AndyH]

The answer to your last question is clearly no. Please provide an example of why you think the accrual rules are not being satisfied. It is difficult to disprove an unknown. Maybe you do have a violation. It is impossible to tell without more information.

[Randy Watson]

Assume a person is in Class C where benefits are equal to .50% of compensation x each yos. Now assume that person is promoted and is now eligible for Class B benefits, which are 1.5% of compensation x yos. I think this is a violation of the 133-1/3 rule.

Do you need more facts?

[AndyH]

I do not think that there is a problem or issue here, but I would like to hear from others. The silence is deafening.

[ak2ary]

Compliance with the 411(b) accrual rules is a form requirement and is applied prospectively only. Thus, if I am a class A employee, I have a scheduled level accrual for all future years which satisfies the 133 1/3 rule. On the day I become a Class B employee, looking prospectively, I have a new level accrual for all future years which satisfies the 133 1/3 rule. You do not look back after the change in class nor do you assume a change in class prospectively. That is, of course, unless there is a progression from A to B (eg A is less than 5 years service; B is more than 5 years)

[Randy Watson]

Okay, I think I got it. Please tell me if I'm wrong.

The first few lines of Section 1.411(b)-1(2)(B) provide that "The annual rate at which any individual who is or could be a particpiant can accrue the retirement benefits payable at NRA under the plan for any later plan year cannot be more than 133-1/3..." The "retirement benefits payable at NRA" are different for each class, which means as long as you are accruing retirement benefits in a particular class you may not violate the 133-1/3 rule. However, if you move to a new class you are eligible for a different "retirement benefit payable at NRA" and are starting with a clean slate for 133-1/3 purposes.

Are you relying on any authority when you say that you do not assume a change in class? How do you know that this is a "form" requirement? I'm sorry that I am asking so many questions that probably seem very simple, it's just that I rarely deal with DB plans.

I greatly appreciate your help.

[ak2ary]

Subparagraph (iv) of the same section

"social security benefits and all other factors used to compute benefits shall be treated as remaining constant as of the current year for all years after the current year"

In this case the participant's employee category would be a factor assumed to remain constant

[AndyH]

Great answers, thank you.

And Randy, there is nothing "simple" about your questions. They are very good questions.