Benefitting under a DB plan

[Gary]

In connection with a challenge by a pension professional I present the following assertions for definitive confirmation.

If a DB plan provides say a unit accrual of 0.5% per year of final avg pay with pension payable as life annuity at normal ret this is considered benefitting for purposes of non discrimination and minimum participation.

If the above plan is offset by a DC plan benefit and the result is sometimes $0 for an annual accrual, the participant is still deemed to be benefitting and participating as above.

Thanks.

[John Feldt ERPA CPC QPA]

§1.401(a)(26)-5. Employees who benefit under a plan

(a) Employees benefiting under a plan

(1) In general. --Except as provided in paragraph (a)(2) of this section, an employee is treated as benefiting under a plan for a plan year if and only if, for that plan year, the employee would be treated as benefiting under the provisions of §1.410(b)-3(a), without regard to §1.410(b)-3(a)(iv).

(2) Sequential or concurrent benefit offset arrangements

(i) In general. --

An employee is treated as accruing a benefit under a plan that includes an offset

or reduction of benefits that satisfies either paragraph (a)(2)(ii) or

(a)(2)(iii)

of this section if either the employee accrues a benefit under the plan for the year, or the employee would have accrued a benefit if the offset or reduction portion of the benefit formula were disregarded. In addition, an employee is treated as accruing a meaningful benefit for purposes of prior benefit structure testing under §1.401(a)(26)-3 if the employee would have accrued a meaningful benefit if the offset or reduction portion of the benefit formula were disregarded.

... etc. ...

(iii) Concurrent benefit offset arrangements

(A) General rule. --An offset or reduction of benefits under a defined benefit plan satisfies the requirements of this paragraph (a)(2)(iii) if the benefit formula provides a benefit that is offset or reduced by contributions or benefits under another plan that is maintained by the same employer and the following additional requirements are met:

(1) The contributions or benefits under a plan that are used to offset or reduce the benefits under the positive portion of the formula being tested accrued under such other plan;

(2) The employees who benefit under the formula being tested also benefit under the other plan on a reasonable and uniform basis; and

(3) The contributions or benefits under the plan that are used to offset or reduce the benefits under the formula being tested are not used to offset or reduce that employee's benefits under any other plan or any other formula.

Be sure to meet all of the conditions in (a)(2)(ii) or (a)(2)(iii).

[tymesup]

Be careful with the uniformity of the offset. Jim Holland has been known to say it's OK if the HCE's have a bigger offset.

The .5% benefit is per a memo by Paul Schultz. It's been repeated in a Grey Book.

Employees who are fully offset in the DB plan count for determining whether the plan is covered by PBGC. However, if they have no accrued benefit, they don't count for premium payment purposes.

They are considered participants entitled to SPDs, SARs, etc. Good luck explaining the arrangement to them.

[Gary]

Regarding the uniformity offset for the NHCEs.

My impression is that the offset should be the same percentage of pay for each NHCE if the plan is to qualify as a safe harbor plan.

However, if some NHCEs receive a higher profit sharing contribution than others (say one employee receives 7.5% and another receives 10%) then the plan would not be a safe harbor plan.

The profit sharing, 401k and defined benefit plan are all being combined for non discrim testing.

So it would seem that if the offset is not uniform for the NHCEs, the plan would not be a safe harbor, but could still pass the general test on a combined basis.

[Dougsbpc]

Our understanding of the uniformity requirement is that it matters for 401(a)(26) purposes.

For example, suppose a DB plan has 5 participants, 1 of which is an hce and 4 of which are nhces. Suppose AFTER the DC offset all nhce benefits are $0. As long as DB benefits BEFORE the offset are at least .5% of pay they count for 401(a)(26) purposes. However, unless the DC plan provides uniform allocations to all participants who benefit in the DB plan, the participants with a $0 benefit AFTER the offset cannot be counted for 401(a)(26) purposes.

[Gary]

The 401(a)(26) analysis is very interesting. Is it discussed in 401(a)(26)?

Thanks.

[tymesup]

From the ASPPA discussion forum:

https://router.asppa.org/eseries/source/for...6259C6864336665

[Gary]

Thanks.

I will have to register and then get the attachment at a later time.

For example say there is a 0.5 offset plan and the DC plan provides 7.5% for 8 NHCEs and 10% for 2 NHCEs and say that they all have a net AB of $0.

Are you saying that none of these employees can be counted for 410(a)(26) or just the two with the 10% allocations?

For example if all employees received 7.5% and all had a $0 AB they would all be counted, so it seems to follow that only the two with 10% allocations should be excluded.

Thanks.

[Mike Preston]

Thanks.

I will have to register and then get the attachment at a later time.

For example say there is a 0.5 offset plan and the DC plan provides 7.5% for 8 NHCEs and 10% for 2 NHCEs and say that they all have a net AB of $0.

Are you saying that none of these employees can be counted for 410(a)(26) or just the two with the 10% allocations?

For example if all employees received 7.5% and all had a $0 AB they would all be counted, so it seems to follow that only the two with 10% allocations should be excluded.

Thanks.

Balderdash. To think so would mean that the language of the regulation, above, is to be read with a very strange prism. What part of "uniform" do you think should be interpreted to mean "uniform except in certain circumstances"?

[tymesup]

One could achieve the same thing with 2 DC plans. One provides 7.5% for everyone and is used as the uniform offset; the second provides an extra 2.5% for the 2 NHCEs. The grey area is whether the 2 contributions can be made within one plan.

***

Pasting the ASPPA thread:

Lawrence Zeller

MSPA

reply

posted: October 25, 2007 12:27 PM

subject: Offset plans & 401(a)(26)

Under Reg. 4.401(a)(26), the gross benefit (before offset) in the DB portion of a floor offset arrangement can be used to meet 401(a)(26) if, among other conditions, the contribution in the DC Plan is allocated "uniformly." A contribution allocated to all participants as a uniform percent of comp or as a uniform dollar amount clearly meet the uniformity requirement.

At the end of the IRS Q&A-DB session at the Annual Conference, Jim Holland gave what I thought was a shocking answer to a question on this topic (Q&A #34). The example dealt with an offset plan where the PSP contribution was 5% of comp to all except 25% to the owner. The question was whether the offset could be applied by taking into account only the 5% allocation for all participants, even though the owner received a larger contribution. Jim said that this appeared to be acceptable, which was good news. But the shocking part cam when he added that it would also be ok if the full 25% allocated to the owner were used in the offset! Someone, I believe it was Kevin Donovan, objected by saying, "but that's not what the law says," and Jim Holland replied, "take my word for it, we (IRS) would not pursue this issue."

So what is Jim implying? First, it seems that a tiered DC allocation formula is ok, and any percent or amount allocated as a base percent to all participants could be used in the offset. But what about that exception where additional amounts are also used in the offset? Does it only apply if the HCEs are allocated a higher percentage than the NHCEs? What if the HCE were allocated zero in the DC Plan? This certainly seems to violate the uniformity issue, but I'm not sure anymore. What if there were several tiers of allocation among NHCEs -- does Jim's answer imply that allocations above the lowest amount allocated to all NHCEs could be used in the offset?

In general, just what are the limits on what contributions can be allocated other than on a uniform basis in the DC Plan for this purpose, and what contributions can be used in the offset and still use the gross benefits to meet 401(a)(26)?

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Kurt Piper

MSPA

reply

posted: October 25, 2007 12:57 PM

subject: RE: Offset plans & 401(a)(26)

Clearly Jim's example HURT the HCE. Giving the HCE zero DC and hence a

lesser offset could easily HELP the HCE.

Jim's answer indeed opens up the question as to what is acceptable

variation, but I am pessimistic about any variation that HELPS the HCE.

That's not a technical response but since Jim did not respond with a

technical argument to Kevin ...

[Gary]

The enclosed attachment seems to indicate some flexibility and variation to the uniformity requirement that apparently is part of 401(a)(26) and its regulations.

It also seems that if 8 NHCEs receive a 7.5% allocation and 2 NHCEs receive a 10% allocation then an offset plan that only offsets the common base amount of 7.5% for all NHCEs is acceptable.

Thanks.

[John Feldt ERPA CPC QPA]

Can you get a D letter, specifically requesting the offset issues to be reviewed for 401(a)(26)? I have heard that some IRS auditors in some regions have no problem with the idea presented above in this thread. Other IRS auditors take you to audit cap. Not a personal experience on my part, but I'm sure another reader can attest to that.

[Blinky the 3-eyed Fish]

From personal experience I can tell you the IRS is all over board on this. I currently have one plan in technical review (for 2+ years now). I await guidance and maybe someday, years/decades from now it will come. For now I do not deviate from a uniform allocation.

The advice to get a FDL is fine and dandy, but keep in mind that the delay in receiving the letter, especially with the new IRS sub cycles, may be years from now. If the IRS doesn't like the design, corrections will be needed. You better have a good safe plan from the start.

[Gary]

So at this point it seems that the uniform allocation enables all employees to be deemed as participating under 401(a)(26).

However, it seems that, aside from the participation aspect, the uniform allocation is not necessary as long as plan meets general test. That is, it of course would not be a safe harbor combined plan, but it can still pass non discrimination. And as long as enough employees participate (i.e. accrual > $0 in the case of non uniform allocation) the plan may be compliant.

[Mike Preston]

Not just > 0, but large enough to be considered benefitting for 401(a)(26) purposes. This requires a "meaningful" benefit.