Floor Offset and 401(a)(26) - a new one

[mwyatt]

Reviewing a case and ran across the following benefit formula by class:

Classes A-E: specific named doctors

Class F: All others

Benefit Formulas purport to be unit% * Years of Participation. Formulas are

Classes A-E: Various percentages (as tuned to each doctor)

Class F: Actuarial Equivalent of benefit provided by 401(k) Plan

with benefits offset by "actuarial equivalent of benefit provided by 401(k) Plan". So in essence benefit provided to Class F is "A" - "A", which if I remember algebra will always equal $0. 5 doctors, around 20-25 in class F. Have a hard time believing that this satisfies 401(a)(26). Any other opinions?

[rcline46]

I don't find class F to have a definitely determinable benefit. Did they get an LOD on the document?

[mwyatt]

No DOL (purport to be volume submitter so not necessary). This just seems too cute to me as an out, and I'm struggling to see how one could claim any benefit under 401(a)(26) here from a common sense standpoint, since by definition no benefit is ever provided to Class F.

[Andy the Actuary]

Couple comments:

(1) Should request an IRS D-Letter if proposing to offset under floor DB plan by the actuarial equivalent of 401(k)/401(m) deferral accounts, as I thought this design is a "no, no."

(2) By design, the Plan always provides HCEs with a benefit and NHCEs with no benefit. Would suspect as you inferred that this Plan does not in form or in practice cover NHCEs and thus may fail 401(a)(26). Better would be to have some non-de minimis formula (1/2 of 1% per year of service) that is always less than the actuarial equivalent of the account balance.

[DMcGovern]

I would think that it would also not pass the reasonable classification test using each Doc by name? Would be interesting to see if the IRS would issue a favorable DL on that.

[John Feldt ERPA CPC QPA]

I would think that it would also not pass the reasonable classification test using each Doc by name? Would be interesting to see if the IRS would issue a favorable DL on that.

If the two plans combined pass coverage at the 70% ratio, then the reasonable classification test does not apply.

As Andy suggests, submit the plan for a full scope D letter which includes 401(a)(26) - maybe even amend the plan first and include the amendment in the request. Explain to the client what's going on.

Perhaps the plan could be amended to truly cover enough NHCEs to get over 401(a)(26), or amended to put in a small flat dollar benefit for all NHCEs but large enough to get a few NHCEs over 401(a)(26). Then offset that if you think it's worth the time and the risk. You probably already know that some IRS agents will not easily provide a D letter for DB plans with offsets.

[AndyH]

Mike,

I have seen a couple of those also - probably done by the same firm.

I don't think they pass 401(a)(26) because they don't have a base benefit.

[mwyatt]

Plan does specify that deferrals aren't taken into account for either the F formula or more importantly for the offset. My bad for not clarifying that in the post.

With respect to the "meaningful" benefit, if "F" formula was specified as .5% but in practice offsets more than covered this so noone gets a benefit, then that would be OK for 401(a)(26) (i.e., could count them as participating under the DB prior to offset and that would be fine). If so, then if could possibly show that the F benefit (which is the offset amount as written) provides at least .5% for participants prior to offset, then this would be OK?

[QNPG]

Reviewing a case and ran across the following benefit formula by class:

Classes A-E: specific named doctors

Class F: All others

Benefit Formulas purport to be unit% * Years of Participation. Formulas are

Classes A-E: Various percentages (as tuned to each doctor)

Class F: Actuarial Equivalent of benefit provided by 401(k) Plan

with benefits offset by "actuarial equivalent of benefit provided by 401(k) Plan". So in essence benefit provided to Class F is "A" - "A", which if I remember algebra will always equal $0. 5 doctors, around 20-25 in class F. Have a hard time believing that this satisfies 401(a)(26). Any other opinions?

In a previous life, I worked on submission packages for LOD for quite a few cash balance offset/401k Plan arrangements.

I submitted my first case in June of 2009 and it took 1.5 yrs to get a favorable LOD but one was received. (Thank God).

Here was the last comment, in relevant part, before I received final approval:

"Under an arrangement where the benefit provided in the cash balance plan is offset by the benefit provided under a profit sharing plan maintained by the same employer, there may be participants who do not receive any allocation to their hypothetical account balance (especially during the early years of the cash balance plan) because their accrued benefit under the cash balance plan is completely offset by their benefit under the profit sharing plan. It is necessary to insure that the requirements of Regs. Sections 1.401(a)(26)-5(a)(2)(ii) or (iii) are satisfied prior to applying section 1.401(a)(26)-5(a)(2) to determine whether the cash balance plan provides a meaningful benefit. In this case, the NHCEs do not receive

a benefit from the cash balance plan.

Since the offset does not apply to all participants, in order to satisfy IRC 401(a)(26) the cash balance plan must demonstrate that the net benefit is meaningful after the offset from the profit sharing plan. Similarly, if the offset is not uniform, such that a greater percentage of the profit sharing plan allocation is used to offset some employees, and a lesser

percentage of that offset is used for other employees, the plan will fail Reg. section 1.401(a)(26)-5(a)(2)(iii). Here again, the cash balance plan will need to show that after all offsets the plan provides a meaningful benefit (.5% per year of service) to at least 40% of all non-excludable employees."

What sparked this response from her was designing a plan very similar to what appears to be written above.

Thought I'd share this in hopes that it would give you some guidance although the previous posts are very informative already.

[mwyatt]

Offset does apply to all groups A-F by reading of document, so don't think I have an issue there. My concern is that as explicitly written, group F benefit before offset is indeed the offset amount (A - A). Seems unseemly to me that could say benefiting for the NHCEs as mathematically impossible for them to ever actually receive a benefit from the DB Plan (not cash balance BTW). Given that percentage of non-zero benefits under the DB Plan is around 20% and solely consists of HCEs, that this design is right out on the edge. I'd have a hard time convincing an IRS reviewer that was in fact OK under 401(a)(26). Haven't even seen General Test results so can't comment on that portion, but 401(a)(26) seems pretty iffy.

[QNPG]

Offset does apply to all groups A-F by reading of document, so don't think I have an issue there. My concern is that as explicitly written, group F benefit before offset is indeed the offset amount (A - A). Seems unseemly to me that could say benefiting for the NHCEs as mathematically impossible for them to ever actually receive a benefit from the DB Plan (not cash balance BTW). Given that percentage of non-zero benefits under the DB Plan is around 20% and solely consists of HCEs, that this design is right out on the edge. I'd have a hard time convincing an IRS reviewer that was in fact OK under 401(a)(26). Haven't even seen General Test results so can't comment on that portion, but 401(a)(26) seems pretty iffy.

Gosh, when I saw offset, my brain automatically went to Cash Balance. Sorry!

[mwyatt]

No problem; my issue is that they are defining the group F benefit before offset as... the offset.

[AndyH]

Offset does apply to all groups A-F by reading of document, so don't think I have an issue there. My concern is that as explicitly written, group F benefit before offset is indeed the offset amount (A - A). Seems unseemly to me that could say benefiting for the NHCEs as mathematically impossible for them to ever actually receive a benefit from the DB Plan (not cash balance BTW). Given that percentage of non-zero benefits under the DB Plan is around 20% and solely consists of HCEs, that this design is right out on the edge. I'd have a hard time convincing an IRS reviewer that was in fact OK under 401(a)(26). Haven't even seen General Test results so can't comment on that portion, but 401(a)(26) seems pretty iffy.

Mike, I saw the explanation of 401(a)(26) compliance for one of these. You are not overlooking anything. Your instincts are right.