New Plan Document - Benefit Formula

[JBones]

A client is adopting a new defined benefit plan, owner and spouse are the only employees. We don't necessarilly want to provide benefits for past service, but do want to create a funding target in the first year in order to provide a range of contributions rather than just having the target normal cost.

What is the best way to draft the benefit formula to provide for this, but avoid potential issues? Specifically, we want to avoid having a benefit at the end of year 1 that is greater than it would be if we weren't trying to create a BOY FT, but also would like to avoid having a minimum benefit for future entrants if possible.

Is there any issue with something like: "4.5% of High 3 AMC x Years of Participation. . . Notwithstanding the above, each Participant who was a Participant as of the Plan's Effective Date shall be provide with a monthly benefit not less than the following: Owner - $X, Spouse $Y"? In this case, X and Y represent what would be the end of year monthly benefits based on the benefit formula and comp history as of the end of the year. X and Y are less than the BOY 415 limits.

Any other suggestions/better ways to accomplish this?

[david rigby]

Hmmm. What if you recognize 1 year of past service? or 2?

Does that produce an onerous result?

[JBones]

Hmmm. What if you recognize 1 year of past service? or 2?

Does that produce an onerous result?

If I recognize one year of past service, then they will have a beginning of year benefit and will also accrue a benefit during the first year of the plan. I basically want to accrue the first year's benefit on day one. If the benefits were at the 415 maximum, then recognizing the year of past service would work because they would have 1,625 at the beginning and end of the first year and accrue another 1,625 each year (assuming no increase in the statutory limit), but they are far below the 415 limit so that wouldn't work here.

I had thought of recognizing 1 year of past service and having the accrual rate for the first 2 years be half the ongoing rate, but then I would not satisfy the accrual rules.

[SoCalActuary]

JB, you can't really have it both ways.

Figure your desired contribution in the first year. Determine the benefit that provides 2/3 of the desired contribution. Grant that benefit as a past service amount, subject to the cushion.

If this provides a 415 limited amount, then you have accrued the entire benefit on day one, and no new accrual during the first full plan year.

Otherwise, you might have a new accrual during the first year, so plan accordingly with the proper benefit level to keep the plan fully funded at the end of year one.

[JBones]

JB, you can't really have it both ways.

Figure your desired contribution in the first year. Determine the benefit that provides 2/3 of the desired contribution. Grant that benefit as a past service amount, subject to the cushion.

If this provides a 415 limited amount, then you have accrued the entire benefit on day one, and no new accrual during the first full plan year.

Otherwise, you might have a new accrual during the first year, so plan accordingly with the proper benefit level to keep the plan fully funded at the end of year one.

I understand that I want to grant a particular benefit as a past service amount, I'm trying to come up with the wording for the plan document that correctly accomplishes that. Does my suggested benefit formula using a minimum benefit for participants employed on the effective date work? It seems that it would provide a funding target and also allow the benefit at the end of the first year to be the same as it would be if there were no minimum benefit or PSL.

[AndyH]

What about a plan effective retroactive to the FDOPY with a formula of y% x years of participation, with one hour of service being required for a year of participation? And you can change it for years after the first if no discrimination timing issue.

[ScottR]

I've generally been relying on 404(o)(2)(B) in the initial PY. i.e. employer may fund toward PVVB at EOY. Anyone disagree?

For a H/W situation, it's generally possible to take the EOY PVVBs right up to the Section 415 max permissible lump sum benefits. Generally, that's the most that I would want them to deposit anyway, to avoid potential surplus problems.

If you really want to max things out for year one, give past service credit to create BOY benefit liabilities at 415 limits, and make 100% J&S the normal annuity form. Funding toward 150% of FT will probably be a lot higher than EOY 415 lump sum limits... not sustainable, but okay for one year if everyone understands what's going on.

... Scott