Limitations On Funding In Years After Formula Was Amended Upwards

[mming]

I remember reading something about this and now I cannot locate the cite to double check. A plan amended their benefit formula from 2% per year to 6%, effective for the 2008 year. I seem to recall that when something like this happens, you cannot use the extra 50% of the funding target for the maximum contribution for the year following the change, i.e., 2009 - is this accurate? Are there any other considerations due to the new rules when the formula is increased? All help is greatly appreciated.

[JBones]

You might be referring to Section 404(o)(4)(A) which excludes the increase in liability attributable to HCE's from your cushion amount.

404(o)(4)(A) IN GENERAL. --For purposes of determining the amount under paragraph (3) for any plan year, in the case of a plan which has 100 or fewer participants for the plan year, the liability of the plan attributable to benefit increases for highly compensated employees (as defined in section 414(q)) resulting from a plan amendment which is made or becomes effective, whichever is later, within the last 2 years shall not be taken into account in determining the target liability.

[mwyatt]

For small plans, have to look at HCE benefits. Rule is for 50% cushion amount, can't reflect amendments in last 2 years (and by IRS logic, really means three years, so for 1/1/09 val, for example, this would mean looking at 12/31/06 benefit provisions). Note that this also includes COLA amendments on salary and IRC 415 limits, as well as benefit amendments. Think that this also translates to the amount due to future salary increases as well.

Note that this for 404 calcs, not 430.

[Blinky the 3-eyed Fish]

Note that this also includes COLA amendments on salary and IRC 415 limits...

Well just to be clear, what exactly is defined as an amendment isn't in the Code. This is the interpretation of some at the IRS.

[mming]

Thank you all for the responses. I was hoping there would be some kind of exception to 404(o)(4)(A) for 1-man plans, but that doesn't seem to be the case. So, since we can use the benefit increases and COLA adjustments for 412 purposes but not for 404, it may be a common occurrence for small plans to have the min. contribution exceed the max. when benefits are increased - another twist in the DB roller coaster ride.

[Andy the Actuary]

Can anyone present a cogent argument that amending the plan to provide unreduced early retirement for an HCE does not fall under the 404(o)(A)(4) cushion restriction? After all, it does increase benefits, albeit not chaning the basic formula.

Presumably, however, if the Plan is terminating, you could change the assumption to retires on the valuation date and pick up most of any shortfall by virtue of the the maximum deduction being at least as great as the minimum contribution which would reflect the Plan amendment.

[SoCalActuary]

Can anyone present a cogent argument that amending the plan to provide unreduced early retirement for an HCE does not fall under the 404(o)(A)(4) cushion restriction? After all, it does increase benefits, albeit not chaning the basic formula.

Presumably, however, if the Plan is terminating, you could change the assumption to retires on the valuation date and pick up most of any shortfall by virtue of the the maximum deduction being at least as great as the minimum contribution which would reflect the Plan amendment.

If you are amending to a higher NRA, but keeping the protected subsidized early retirement, how have you amended to increase benefits?

[Andy the Actuary]

Can anyone present a cogent argument that amending the plan to provide unreduced early retirement for an HCE does not fall under the 404(o)(A)(4) cushion restriction? After all, it does increase benefits, albeit not chaning the basic formula.

Presumably, however, if the Plan is terminating, you could change the assumption to retires on the valuation date and pick up most of any shortfall by virtue of the the maximum deduction being at least as great as the minimum contribution which would reflect the Plan amendment.

If you are amending to a higher NRA, but keeping the protected subsidized early retirement, how have you amended to increase benefits?

The Plan has always provided for an NRA of 62. It has never provided for an early retirement benefit. Now, the plan is eing amended to allow unreduced, immediate early retirement at age 52.

[david rigby]

Just an opinion, without any significant cross-checking:

The reference to "benefit increases" in IRC 404(o)(4)(A) is intended to refer to any plan amendment that increases the Funding Target for HCEs, regardless of the specific characteristics of the amendment.

Sure, (a) it's not a cogent argument, and (b) it's not arguing in your favor.

Sorry.