Safe harbor benefit formula

[Guest saeissler]

I have a plan with a benefit formula of 500% X compensation reduced 1/25 for years of service less than 25 years, limited to 100% compensation. Accrual is pro rata based on participation.

A participant has 5 years of past participation and 30 years of future participation. His compensation is $1,000/month.

His projected benefit is calculated as $1,000 X 500% X 25/25 = $5,000 limited to $1,000. His accrued benefit is $1,000 X 5/35 = $142.86.

Does this meet the safe harbor under 1.401(a)(4)-3(b)(4)(i)(2) which begins "The normal retirement benefit under the plan must be a flat benefit that requires a minimum of 25 years of service at normal retirement age for an employee to receive the unreduced flat benefit, determined without regard to section 415...." and which ends "......An employee is permitted to accrue the maximum benefit permitted under section 415 over a period of less than 25 years, provided that the flat benefit under the plan, determined without regard to section 415, can accrue over no less than 25 years."

[SoCalActuary]

Are you certain of the accrued benefit?

I see the possibility of:

$5,000 x 5/35 = $714.29 as the accrued benefit.

Limited to $1,000 x 5/10 = $500 if service was 5 years to date.

The difference is in the plan document, which must address the question of when the 415 limit is applied.

If the 415 limit is applied before the fraction, your numbers are correct. If the 415 limit is applied

after the fraction, see above.

My method is definitely a safe-harbor design. Your's is too.

[Mike Preston]

Are you certain of the accrued benefit?

I see the possibility of:

$5,000 x 5/35 = $714.29 as the accrued benefit.

Limited to $1,000 x 5/10 = $500 if service was 5 years to date.

The difference is in the plan document, which must address the question of when the 415 limit is applied.

If the 415 limit is applied before the fraction, your numbers are correct. If the 415 limit is applied

after the fraction, see above.

My method is definitely a safe-harbor design. Your's is too.

I didn't think that a plan formula that was based on service but pro-rated on participation qualified as a safe-harbor?

Then again, from the description given, I'm not sure that this is a plan that bases the benefit on service at all.

[SoCalActuary]

I agree with Mike, that you must use the same definition of benefit accrual for safe-harbor status.

If both are based on years while a participant, I call that "years of participation." If both are based

on years that may have begun before date of entry, I call that "years of service."

Your example showed years of participation for the individual, but you described years of service in your discussion. I assume further that the participant with 5 past years is in a plan that is already at least 5 years old, not a new plan.

[Guest saeissler]

Sorry - the benefit formula reduces 1/25 based on years of participation, not service. My question was whether I can apply the 415 limit before accrual and still meet the safe harbor provisions cited previously. I believe that I can, since I do meet the safe harbor benefit formula, the accrual rules are met separately, and I believe that I can apply the 415 limit before the accrual fraction. Also my document specifies that the 415 limit is applied before the accrual fraction, and was thus approved. But the actuary inheriting this plan from me is concerned that this arrangement circumvents the safe harbor provisions, so I thought I would get a second opinion.