Testing Compensation for General Test

[flosfur]

An employee became eligible to enter the plan 1/1/04. During 2004, he worked for 4 months and earned $11,500 with 650 hours of credited service. He needs to be included in the plan to pass the 410 (b) coverage test.

Benefits are based on Hi 3 average comp during participation. The average compensation is averaged over the actual number of months worked "if the completed Years of Participation" are less than 3.

Given the above, his benefits will be based on his monthly average of $2,875 (=11,500/4). His annualized comp would be $34,500 (11,500*12/4).

For the "current plan year" testing method, what is his annual Testing Comp - $11, 500, the comp actually earned during the year or $34,500, the annualized comp?

Section 1.401(a)(4)-3(e)(2)(ii)(A) reads: ".......... If the measurement period for determination of accrual rates is the current plan year or the plan is an accumulation plan....., then plan year compensation may be substituted for average annual compensation."

I am inclined to use $11,500, since it is irrelevant to testing how the benefits are determined - 1.401(a)(4)-3(e)(1).

[mwyatt]

Not exactly sure of the answer here, but I would notice that if you use the $11k for testing the testing accrual rate will 3 times higher than the true accrual rate. I wouldn't want to have this person be the lynchpin in passing the General Test with an inflated accrual percentage...

[AndyH]

flosfur, is the plan formula related to service? If so, isn't the comp annualizing balanced by multiplying by less than 1 YOS?

I think that what you propose may work, but I'd like to hear more specifics on that the actual accrued benefit is and how it is determined.

[mwyatt]

Good point Andy. What service is being credited, given his partial accrual?

[flosfur]

flosfur, is the plan formula related to service?  If so, isn't the comp annualizing balanced by multiplying by less than 1 YOS?

I think that what you propose may work, but I'd like to hear more specifics on that the actual accrued benefit is and how it is determined.

No, not quite. Fractional is based on 1000 hours, so he gets 0.650 year service credit. It would balance out approximately if fractional accrual was based on 2000 or 2080 hours.

Anyway, how the fraction is determined or how the comp is annualized should not affect the testing comp for the current plan year testing method - should it?

One could have a formula of $x per year of serice which is totally unrelated to comp but one still has to determine the testing comp for computing the accrual rate.

[AndyH]

Anyway, how the fraction is determined or how the comp is annualized should not affect the testing comp for the current plan year testing method - should it?

Yes, it can, if you define comp as average comp or if you choose to modify it in any of a number of ways.

One could have a formula of $x per year of serice which is totally unrelated to comp but one still has to determine the testing comp for computing the accrual rate.

No, I don't necessarily agree. The benefit can be tested as either a percent of pay or as a dollar amount unrelated to compensation.

Back to the original question, if you choose to use plan year comp the rules are defined in the definition in 1.401(a)(4)-12 which would seem to allow you to do what you propose.

But since the rules are a bit ambigous, Mike's comments about not relying on this to pass represents wise advice.

[flosfur]

Yes, it can, if you define comp as average comp or if you choose to modify it in any of a number of ways.

It is irrerevalent to the situation under consideration - current year accrual method using "current year" comp.

No, I don't necessarily agree. The benefit can be tested as either a percent of pay or as a dollar amount unrelated to compensation..

Again, for the situation under discussion - testing as % of pay, the testing comp needs to be determined.

But since the rules are a bit ambigous,  Mike's comments

about not relying on this to pass represents wise advice.

Where is the ambiguity?

[AndyH]

I'll offer the following final comments:

It is irrerevalent to the situation under consideration - current year accrual method using "current year" comp.

1. It is relevant. I was trying to say that I think you can use the unmodified comp for the current year ("Plan Year Comp") or Average comp using one year which could be annualized or not annualized or based upon participation period or not.

2. I think your premise may be incorrect about how the accrued benefit is determined.

Benefits are based on Hi 3 average comp during participation. The average compensation is averaged over the actual number of months worked "if the completed Years of Participation" are less than 3.

Given the above, his benefits will be based on his monthly average of $2,875 (=11,500/4). His annualized comp would be $34,500 (11,500*12/4).

Isn't this a contradiction? Assuming that he was employed in 2003, since he did not have 3 "completed Years of Participation" isn't his comp averaged over the actual number of months worked including 2003?

3.

Again, for the situation under discussion - testing as % of pay, the testing comp needs to be determined.

I was replying to the last paragraph of your second post, which I submit is incorrect.

4. Regarding what is ambiguous, I find the permitted modification language in 1.401(a)(4)-12 to be less than clear.