accrual requirements

[John Feldt ERPA CPC QPA]

Is it permissible for plan to require 1000 hours for HCEs to accrue a benefit during a plan year, but less than 1,000 hours for the NHCEs?

We're looking at a prospect with high turnover, and 401(a)(26) could easily become an issue. A lower hours requirement would help, but they want to keep the large portion of the plan costs (the HCE accruals) at 1000 hours in case a formula change or a plan freeze is necessary.

[Andy the Actuary]

There are no discrimination issues when a Plan offers less favorable terms to an HCE than and NHCE. While it might be preferable to define the class by a characteristic (i.e., senior manager), it should be acceptable to say HCE. Your issue becomes defining HCE for this purpose (such as an employee whose annual pay rate exceeds the 414(q)(1)(B) ($110,000) limit and you also have to deal with when a employee moves from HCE to NHCE and vice-versa; in this respect, the recommendation is once an HCE, always an HCE, including the year the employee became an HCE.

[QNPG]

Is it permissible for plan to require 1000 hours for HCEs to accrue a benefit during a plan year, but less than 1,000 hours for the NHCEs?

We're looking at a prospect with high turnover, and 401(a)(26) could easily become an issue. A lower hours requirement would help, but they want to keep the large portion of the plan costs (the HCE accruals) at 1000 hours in case a formula change or a plan freeze is necessary.

My two cents:

My first concern was whether it was a BRF issue but it is not. "Benefits" for purposes of the availability tests does not encompass the allocation or benefit formulas under which the participants accrue benefits under a plan or the requirement to receive such contribution/benefit. Those allocations or benefits do not have to be available on a nondiscriminatory basis, but the allocations or accruals must satisfy the nondiscrimination test.

My guess would be to make sure it satisfied 410(b) rate group test - don't see a problem with that either since you're favoring NHCEs. I would also make sure your document could provide for a different allocation requirement for different classes of employees. May require entire restatement if the document doesn't support that option on its pre-approved format.