Different Benefit formulas for employees

[Gary]

Say a plan sponsor wants to draft a DBP that provides different benefit formulas as follows:

10% unit accrual for Employees A and B

2% unit accrual for employees C, D, and E

0% for EEs F and G

1% offset formula for EEs H, I, J, and K.

The above is hypothetical, and endless variations can apply.

We'll assume that the above formula, combined with the DC plan passes non discrimination and coverage.

The question is:

How could or should the DB plan be drafted in terms of who gets what formula?

Should it explicitly say who (by name) gets what formula?

Must employee classes be created that includes specific employees by name? Even if there is no real criteria except to pass non discrimination?

This is a pet peeve of mine.

Thanks.

[SoCalActuary]

The standards are document must determine the benefit. This has not changed.

So you name the formula for each group or each person, so no one has an ambiguous benefit.

Remember, you are describing the benefit amount, not the 410b coverage issues.

[david rigby]

To support SoCal's comment, from the GrayBook:

99-20

Nondiscrimination: Grouping by Names

Plan A is a money purchase pension plan with the following formula:

• Participant B is allocated $30,000/yr.

• Participant C is allocated $25,000/yr.

• All other employees who have attained age 21 and who have at least one year of service are allocated 5.0% of pay each year.

Plan A complies with the nondiscrimination requirements of IRC 401(a)(4) by cross testing. Is the above design permitted?

RESPONSE

Yes. IRC 410(b), and the regulations thereunder, prohibit the use of individual names as part of the reasonable classification portion of the average benefits test to denote who participates in the plan, and who does not. In the above situation, all eligible employees participate, so that the use of individual names is not an issue.

General tested plans use the average benefit percentage portion of the average benefits test for purposes of seeing if the plan can be tested using the midpoint between the safe and unsafe harbors in rate group testing. Since the “no names” rule is part of the reasonable classification test, and for purposes of rate group testing, the plan is considered as having passed this test, it is permissible to use names as part of the plan formula and in the testing process.

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[Gary]

Ok, so I'll presume that this technique is also allowed in DB plans and not just DC plans.

Does this mean that we cannot exclude employees from the DB plan, unless they are part of a reasonable employee class (i.e. hourly employees) and not just a select few individuals? That is, I cannot have the plan provide a 0% formula for a few named individuals because 410(b) prohibits this?

Any suggestions as to how to exclude select employees, while, of course passing coverage and non discrimination? Must I come up with an employee group classifcation?

Thanks.

[SoCalActuary]

In a DB plan, as in a DC plan, you can exclude people by name.

You simply have to accept responsibility for the testing consequences, including the fact that you still have to pass 410(b) and that you might not get the easiest results using the average benefits percentage test method, because you are not using a "reasonable classification" rule.

[Guest TooMuchFreeTime]

Also, if you DO decide to go the route of employee classificaitons, be careful... If you define them such that somebody could conceivably shift from one classification, you'll be saddled not only with the administrative hassle of tracking all of this, but dramatic changes in an individual's benefit formula could run afoul of the backloading/accrual rules.