Additional benefit to avoid discrimination

[Gary]

I have a plan with two active participants. They are both non-owners and one participant is HCE and the other is NHCE.

Essentially the plan provides a benefit of 100% of compensation at normal retirement and the accrued benefit is based on the projected normal retirement benefit multiplied by the ratio of credited service at determination over credited service at normal retirement.

Since it does not require at least 25 years to be fully accrued, it does not meet the safe harbor.

And since the HCE has only 23 years of CS at NRD and the NHCE has 45 years of CS at normal retirement, the rate of accrual (and the accrued benefit as a percentage of pay after 3 years of participation) for the NHCE is less than 70% of that for the HCE.

At the end of the 3rd year of plan participation for each participant the NHCE terminates.

At first blush, it seems a remedy of this would include providing a pension that is (as a percentage of average compensation) 70% of percentage provided to the HCE to avoid being discriminatory in favor of HCEs. That is, an increase in benefits to the NHCE to avoid discrimination in operation.

Any observations?

[AndyH]

Amend the plan so that the denominator of the accrual fraction is limited to a maximum of 32 years.

[Gary]

Andy,

Your point is right on point.

Just a little more info to give though, since you provided a specific remedy.

At the end of the plan year in which the participant terminated.

The HCE had 13 years of CS and has 20 at NRD

The NHCE had 13 years of CS at termination and 45 at NRD.

The accrued benefit is based on credited service.

So since the HCE has an AB that is 13/20 or 65% of avg comp. I determined that the NHCE should have a pension at least equal to 0.65*.7 or 45.5% of avg comp.

Thoughts on the above?

[AndyH]

I agree kind of.

The absolute figures may or may not be correct. They would be correct if this plan only covered these two people always, and the plan was intended to meet the alternative flat benefit safe harbor, both of which are assumptions that may be incorrect.

I agree with your concept and the relative accrual rates but I'm not as comfortable about needing to apply this to all 13 years. There could have been other ways of satisfying the rules in prior years.

But for a new plan, for example, your concept is correct.

[Gary]

Point well taken.

This plan only has the 2 participants and now the NHCE has terminated leaving the one HCE and it is attempting to pass the alternative flat benefit safe harbor.

Funding had always been based on the projected benefit (aggregate method) of 100% of pay for both participants, so it probably hasn't impacted the plan funding funding thus far.

After the employee terminated after 3 years of participation and 13 years of CS and my first year of administering the plan, did it occur that there was discrimination to be corrected. Which meant a correction to the accrued benefit for the NHCE and basically it is his terminated accrued benefit.

Thanks.

[SoCalActuary]

You achieve your non-discrimination result of 70% with a maximum service limit in the denominator. In your example, you need 20 / 0.7 = 28.5 maximum years for your NHCE, since 20 is the denominator for the HCE.

In addition, your original plan design was not a safe-harbor, so your plan has a disqualification in operation since your benefits failed 401a4. A retroactive fix is proper here, and for practical purposes, you should just adjust the benefit for the terminating employee as the appropriate self-correction.

I would also ask who goofed in setting this plan up. Does anyone take responsiblity for a bad plan design?

[david rigby]

Does anyone take responsiblity for a bad plan design?

Does anyone ever?

[AndyH]

Isn't there a violation of form as well as operation? I'm not sure that a quick fix covers prior years. Gary, I would require the client to seek legal advice as a condition of doing further work.

And, FWIW, the first example had the HCE with 23 years of projected service and the second 20, thus the differences in the suggested fix.