Providing a year of past service in an amendment

[John Feldt ERPA CPC QPA]

Suppose a plan amendment is done that provides a year of past service (prior to the effective date of the amendment).

Also, suppose the amendment is written to only affect the benefit accrual (upward) for a one HCE - it does not change the benefits for any other participants. Overall, even with this higher benefit accrual, the general test under 401(a)(4) passes.

Is the amendment deemed to be nondiscriminatory? The past service provided did not exceed 5 years and the accruals do not appear to fail under 401(a)(4) testing.

[Effen]

I'm not so sure that it would be. At the least I would have the plan attorney explain the possibility to the client and let them make the decision.

1.401(a)(4)-5 contains the following safe harbor:

(3) Safe harbor for certain grants of benefits for past periods. --The timing of a plan amendment that credits (or increases benefits attributable to) years of service for a period in the past is deemed not to have the effect of discriminating significantly in favor of HCEs or former HCEs if the period for which the service credit (or benefit increase) is granted does not exceed the five years immediately preceding the year in which the amendment first becomes effective, the service credit (or benefit increase) is granted on a reasonably uniform basis to all employees, benefits attributable to the period are determined by applying the current plan formula, and the service credited is service (including pre-participation or imputed service) with the employer or a previous employer that may be taken into account under §1.401(a)(4)-11(d)(3) (without regard to §1.401(a)(4)-11(d)(3)(i)(B)). However, this safe harbor is not available if the plan amendment granting the service credit (or increasing benefits) is part of a pattern of amendments that has the effect of discriminating significantly in favor of HCEs or former HCEs

I think you need to look at the timing of the amendment. In other words, if they amended the plan 1 years ago to do this without granting past service, would any NHCEs have benefited?

I would tread lightly and let the attorney take the risk for making the call.

[John Feldt ERPA CPC QPA]

Even if the amendment were done a year ago, suppose it would have used no prior service at that time, and suppose it would have only increased accruals for one HCE. Any problem with that?

[Effen]

How many past service years are you granting? If you would have implemented the amendment that many years ago, without any past service, would any NHCEs have benefited? If so, you might have an problem. It is a facts/circumstances test so there isn't any real way of knowing for sure.

[John Feldt ERPA CPC QPA]

The amendment would be done in 2008 to take the 12/31/2006 accrued benefit and add on higher accrual formula using a fresh-start date of 12-31-2006. In effect, granting one year of past service for 2007 under the formula.

[J Simmons]

J4KFBC,

It looks to me like your situation fits the safe harbor of Treas Reg § 1.401(a)(4)-5(a)(3), provided however the amendment is not "part of a pattern of amendments that has the effect of discriminating significantly in favor of HCEs or former HCEs"--but there is no hint of that from the facts you posit. If this is the only amendment, then there could be no pattern. That would leave the issue of timing of the amendment as the only Treas Reg § 1.401(a)(4)-5 issue. And Treas Reg § 1.401(a)(4)-5(a)(3) provides a safe harbor from the facts-and-circumstances analysis of Treas Reg § 1.401(a)(4)-5(a)(2) for discriminatory timing. Meet that safe harbor and your timing would not of itself be a 401a4 discrimination problem.

[John Feldt ERPA CPC QPA]

This is the only amendment to the DB plan formula (so far).

My concern is in the middle of 1.401(a)(4)-5(a)(3): "... the service credit (or benefit increase) is granted on a reasonably uniform basis to all employees, ..." -- if only an HCE has a benefit increased by the amendment, how does this satisfy "uniformity". Can a DB plan amendment be made that only increases a benefit to an HCE (assuming the plan has NHCEs)?

[J Simmons]

After the amendment, will all service of all EEs (HCE and NHCE alike) be taken into account? The fact pattern suggests that if anyone will yet not have all his or her service count it be the HCE, not the NHCE.