Accrual rules - new plan

[AndyH]

New plan - one lifer - yet to be written.

Optimum formula to match client's cash flow is a unit benefit of 6% of Pay x YOP in the first year, with this changed to 10% of pay thereafter. I don't really care if the 10% formula is retroactive or starts in year 2.

I think I have an accrual (133% violation). But I also believe that instead of writing these formulas into the document I could start with the first one, and amend it in year two, removing the accrual violation. I think that is an exception.

This seems like form over substance and an unneccessary waste of paper and time.

Comments?

Oh, and, yes, this is a regular DB plan. The problem could be solved with a cash balance plan but that is not on the table. I could also probably solve it with an annual accrual design. But these options are beside the point - what about the unit accrual design?

[Effen]

Definitely form over substance but definitely necessary to amend the formula for year 2.

I've been down the road with the IRS and fought it all the way to Mr. Holland's Opus to no avail. Just waste an extra sheet of paper and all will be fine. If you do it on one piece of paper it is a violation, but two pieces of paper and it’s not. Also, just like the Wizard from Oz, pay no attention to the example in the Reg that appears to permit what you propose. Apparenlty the IRS doesn't agree with the wording anymore. :angry:

[AndyH]

Thank you!

[Andy the Actuary]

Under this formula, won't participant's accrual satisfy the 3% minimum accrual method, provided AB capped at 100%?

[AndyH]

Maybe. Don't work with that much but you might be right.

Let's say I cap credited service at 5 (the participant is 64).

1 x 6% =6%

4 x 10%=40%

Total 46%

.03 x 1 YOP x 46% = 1.38% needed, have 6%. Does that work?

[Andy the Actuary]

You're way ahead of me because I've never worked with 411(b)(1)(A). Your example looks fine.

The rule clearly cannot practically be widely applied. For example, it would permit an accrual of 3% in years 1-9 and then 73% in year 10, for a total benefit of 100% after 10 years. Of course, this formula would apply to all participants.

[AndyH]

Good example, thanks for your comments. This does seem to work despite the backloading; at least I have yet to find where it doesn't.