412(i) with 401k s.harbor

[MJ Hartman]

I have been asked to draft a 401k s.h. match plan that will only cover hces' (7 hces)as the nhce's (2) will be covered in a 412i plan. no hce's in the 412i, just the non-highlys

another tpa will be administering the 412i plan (actuary)

I know that you can set up plans that just cover the nhces using a s.h. 401k plan to load up the db plan for the hces., but this is a new one to me. I know that coverage should pretty much pass.

they are telling me the excluded staff aren't excluded by any classification of employee in the s.h. plan; I don't know if they will be cornering them in the parking lot to make them sign an enrollment form not to defer or are actually expecting to just exclude them altogether.

this type of design just seems fuzzy, maybe its the 412i portion for funding? any comments would be appreciated.

[rcline46]

A 412(i) plan is a defined benefit plan. 401(a)(26) says that a db plan must benefit the lessor of 50 employees or 40% of the employees. 9 time 40% is 3.6 which means 4 employees must benefit. You are saying 2 employees. How are you passing 401(a)(26)?

[MJ Hartman]

A 412(i) plan is a defined benefit plan. 401(a)(26) says that a db plan must benefit the lessor of 50 employees or 40% of the employees. 9 time 40% is 3.6 which means 4 employees must benefit. You are saying 2 employees. How are you passing 401(a)(26)?

I'm not! thank you for the response; I have decided not to accept this plan as a tpa, there are too many issues that aren't making sense per what the attorney, the investment advisor(s) the actuary and the client are telling me.

[AndyH]

Any chance you could name the shark that is trying to install this one? Swim very fast.

[jpod]

It's been a while since I had to look this up, but isn't a plan that covers only nhces exempt from 401a26 (or deemed to automatically satisfy it)?

[rcline46]

It would automatically satisfy 410(b) and 401(a)(4). I would be happy to hear an exception to 401(a)(26).

[John Feldt ERPA CPC QPA]

Well it does, but not exactly. If you aggregate with another plan so that other plan can pass 401(a)(4), then that exception goes bye-bye.

1.401(a)(26)-1(b) Exceptions to section 401(a)(26):

(1) Plans that do not benefit any highly compensated employees. --A plan, other than a frozen defined benefit plan as defined in §1.401(a)(26)-2(b), satisfies section 401(a)(26) for a plan year if the plan is not a top-heavy plan under section 416 and the plan meets the following requirements:

(i) The plan benefits no highly compensated employee or highly compensated former employee of the employer; and

(ii) The plan is not aggregated with any other plan of the employer to enable the other plan to satisfy section 401(a)(4) or 410(b). The plan may, however, be aggregated with the employer's other plans for purposes of the average benefit percentage test in section 410(b)(2)(A)(ii).

So, the other plan's use of the 412i plan to pass 401(a)(4) removes this exception, as I see it.

[AndyH]

According to an internet Q&A, sharks cannot swim backwards. Fishermen will drag a shark backwards by boat till it's dead because the rush of water up the gills drowns it.

Seriousness aside, who would put NHCEs but not HCEs in a 412(i) besides somebody that either is taking part of the commissions or got seriously bullied as a small child by an actuary?

[mwyatt]

Agree w/ Andy, haven't ever heard of setting up a 412i scheme to cover only 2 NHCEs. Usually the drill is the crotchedly old owner, plus NHCEs in the 412i, with the associate attornies thrown to the wolves. Sure you have the scenario correct?

[Belgarath]

You DB'ers can probably answer this, but if the proposed scenario is actually what is being contemplated, is it possible that the level annual premium for annuity only on the 412(i) plan could somehow work out to a lower contribution for the NHC than what the employer would have to contribute under the SH match? (Say they are 21 and really make very little money?)

I've seen employers go to ridiculous lengths (and expense) to avoid giving a few extra bucks to NHC. "Stepping over a $20 to pick up a $1" is the way some of them work.

But, I don't know if there's any possibility that this could work.

And I also have never even remotely heard of such a scenario.

[AndyH]

I don't see how. I think you'd need to cross test one or the other for the ABT at 7.50-8.50% and that either means the match projections result in yuge EBARS or the pv of the db "accruals" are tiny.

[MJ Hartman]

update. talked with one of the brokers (of course there will be more than 1 involved). now they tell me there will be 3 hce's in the 412i plan plus the 2 nhces. I still told them thanks but no thanks. Any takers?

[mwyatt]

Just had another proposal come across my desk, which was generated very recently. This one used a CB 401k combo. Somehow for a 40-year old principal w/ a 62 NRA, showed a lump sum of $3.2m at age 62 (and CB credits twice as high as called for for 22 year funding under IA). Just because you call it cash balance means you get to blow off 415?. Also had $2m of insurance. When lurked further on the purveyor's website, saw the plan "to avoid market uncertainty" was to invest everything in GICs.

Guess Jimmy Holland will just have to holler a little louder at the next meeting. Some of these guys haven't heard the news...

[SoCalActuary]

Just had another proposal come across my desk, which was generated very recently. This one used a CB 401k combo. Somehow for a 40-year old principal w/ a 62 NRA, showed a lump sum of $3.2m at age 62 (and CB credits twice as high as called for for 22 year funding under IA). Just because you call it cash balance means you get to blow off 415?. Also had $2m of insurance. When lurked further on the purveyor's website, saw the plan "to avoid market uncertainty" was to invest everything in GICs.

Guess Jimmy Holland will just have to holler a little louder at the next meeting. Some of these guys haven't heard the news...

What you describe has two faults - the insurance face amount, and the lump sum at age 62, assuming it is strictly the DB projection. The insurance amount might be reasonable under the old 74-307 rules based on the 1/3 rule, since this is a young participant.

The rate of contribution is judged by the 415 lump sum rules, which are twice as valuable as 22 year IA funding. Try looking at it again with traditional unit credit.

If the illustration reflects an assumption that 415 limits will index with inflation, then the 3.2 m is not unreasonable or irresponsible. You just can't fund for it now. If the illustration is for the combined DB/DC plan accumulations, then it is reasonable as well.

The GIC issue is investment advice. We actuaries are free to criticize others giving investment advice that is self-serving. But if you are not licensed, you can't give it either. And if you are licensed, you have a duty to discuss the client's risk tolerance and the consequences of stable value assets vs volatile markets.

[mwyatt]

No COLA projection on LS indicated (as they were tying it to a $15k benefit). Wasn't reflecting accumulation of 401k w/ cb either. Further, the proof of pudding "testing" in their proposal consisted of some red font "PASSED", even though they had a cb rate of 37% for the 40 year old, while a 6% for the youngest NHCE, who was only 14 years younger. W/o getting into gritty details, applying 8.5% for 14 years to the 6% cb put that to 18.8%. Would have liked a little more detail on how this plan could have passed the general test, but I guess I'm just not clued into these "3rd generation" plans.

Experience has been in the past w/ these outfits is they have no conception that their alternative "superior" scheme falls under the same LS guidelines as trad db plans. Usually when I talk to the person who has presented such a proposal I get a very long pause on the other end of the phone line (and that's the last that I hear of these schemes).

Actually had a thought here for a new scheme. The "sleepeasy" DB plan. You agree to contribute cash, which will be placed into a secured mattress; we then, given the solemn promise that none of this cash will flow out to any investment that will generate a positive return, will allow us to assume a 0% return from now until NRD. Imagine the potential here (and we're not funding an agent's retirement plan at the same time).