Plan Document

[Gary]

Below is a section of a DB plan that defines the benefit formula. I just provide the concept in simple terms for purposes of this question.

Class A Participants: Owners (say 2 of them)

Benefit of 5% per year

Class B participants: Employee Smith, Employee Jones, Employee Brown

Benefit of 0.5% per year offset by benefit from profit sharing plan

Class C participants: all other eligible employees (say 3 other employees)

Excluded from plan

Without getting into details the plan will be tested with DC plan to pass non discrimination

Any problem with having Classes of participants that directly reference names as above?

Thanks.

[AndyH]

No, as long as you satisfy 410(b) by using the ratio/percentage test. The average benefits test is unavailable for 410(b) purposes since you don't use a reasonable classification (as defined in 1.410(b)) to define who participates in the plan.

IMHO that is.

p.s. but it appears that you would fail the ratio/percentage test, so this does not work.

[SoCalActuary]

No, as long as you satisfy 410(b) by using the ratio/percentage test. The average benefits test is unavailable for 410(b) purposes since you don't use a reasonable classification (as defined in 1.410(b)) to define who participates in the plan.

IMHO that is.

p.s. but it appears that you would fail the ratio/percentage test, so this does not work.

But the test is being done on the combined plans, so you have 100% participation if everyone gets a DC allocation in a permissive aggregation of the two plans. You only fail if the plan is tested separately.

[AndyH]

Agreed. i should have been clearer on that point. Thanks for the followup.

[Blinky the 3-eyed Fish]

If the offset is applying just to Class B and not to class A, you probably have (a)(26) issues though.

[Gary]

Regardin a26 I thought a unit accrual of 0.5 is considered benefiting under the plan and that the offset did not apply in determining if participant is benefiting?

thanks

[Blinky the 3-eyed Fish]

That is true, but by not applying the offset to class A, there are those at the IRS that will challenge it under (a)(26)-5. I don't have time to go into details, other than I know such challenges exist. If you have a FDL on (a)(26), then you are in much better shape than if you don't.

[Gary]

I inadvertantly put in an incorrect post and deleted it.

[Gary]

I looked at 1.401(a)(26)-5(a)(2)(iii)(2) regarding "The employees who benefit under the formula being tested also benefit under the other plan in a reasonable and uniform basis"

My thought is "the employees who benefit under the formula being tested" applies only to the employees who have the offset formula since they are the employees who benefit under the formula. That is, it seems that the participant who does not have an offset is not part of the group "employees who benefit under the formula being tested". His formula (the non offset formula) is not being tested; it's the offset formula that is being tested.

Well of course my opinion doesn't necessarily matter if the IRS sees it differently.

It doesn't seem to serve any purpose to have the one owner have an offset allocation that is the same as the NHCEs or at all for that matter.

The issue is are the NHCEs benefiting under DB plan. Providing more or less to the one owner doesn't seem to change weather the others benefit or not.

A uniform offset to those with an offset benefit does make sense though. So if all NHCEs receive gateway that would be reasonable and uniform.

Just my opinion.

Thanks.

[SoCalActuary]

Gary, you should consider a strategy where you apply the offset uniformly to all the DB participants. Since this lowers the benefit for the HCE, then just raise his base benefit up to where it was using the same amendment.

[Gary]

I understand what Socal is saying.

Essentially providing the same offset to the owner and providing a larger gross benefit under DB plan may have no real practical impact except to please the IRS w/r/t a technicality.

However, the owner in some instances is set up to receive nothing under DC plan and if her were to receive gateway it could put DC contribution above 6% DC combined plan deductible plan limit.

Some food for thought.

[SoCalActuary]

I understand what Socal is saying.

Essentially providing the same offset to the owner and providing a larger gross benefit under DB plan may have no real practical impact except to please the IRS w/r/t a technicality.

However, the owner in some instances is set up to receive nothing under DC plan and if her were to receive gateway it could put DC contribution above 6% DC combined plan deductible plan limit.

Some food for thought.

The results of your calculations do lead to a problem, but the alternative is an audit risk that the offset will not meet the rules for uniform plan. Get a ruling if you want safety.