Can There Be Discrimination Where There's No Discrimination?

[Andy the Actuary]

The Big Screw, age 62, owns and operates ScrewYa Corporation (SYC). SYC employees 1,000 NHCEs. Benefits are accrued over the the employee's working life time. And it just so happens that all employees are age 40 and were hired at age 20 when the Big Screw started SYC 20 years ago at his age 42. There has been no turnover or new hires. The Plan provides for lump sums to be determined using a 2 1/2% lump sum interest rate and The Big Screw's accrued benefit is just such so that under all the hoops his 2 1/2% lump sum at age 62 is exactly the maximum 415 benefit. So, The Big Screw retires and immediately the Board of Directors, of which The Big Screw is chairman, amends the Plan to modify the lump sum interest rate to the 417(e) rates with, of course, the accrued benefits at the time of amendment lumped sum on wear away basis to 2 1/2% and let's just assume SYC is such a great place to work that all keep working until the grandfather wears away.

So, The Big Screw -- the only HCE -- has his benefit determined using 2 1/2% and 1,000 NHCEs have their lump sum computed using 417(e).

Any comments (other than I just have too much time on my hands)?

[ETA Consulting LLC]

My question (really a question) is does the need for a nondiscriminatory benefit structure come into play here. It would appear that a deliberate series of structures to that effect would create a discriminatory benefit structure, but I don't know enough about the subject matter to determine how it's calculated.

I would like to know how this works.

[Kevin C]

Andy,

What about timing issues under 1.401(a)(4)-5? Your example sounds pretty close to example 2.

Example 2. Plan B is a defined benefit plan that provides a social security supplement that is not a QSUPP. After substantially all of the HCEs of the employer have benefited from the supplement, but before a substantial number of NHCEs have become eligible for the supplement, Plan B is amended to reduce significantly the amount of the supplement. The timing of this plan amendment has the effect of discriminating significantly in favor of HCEs.

[frizzyguy]

What about the fact that 2.5% is protected on all past accrued benefits? I think that would protect against non-discrimination.