415 Pct of Pay Limit

[Dougsbpc]

Suppose you have a small DB plan that was effective 1/1/2007 and only requires 1 hour of service per year of participation to accrue a benefit. Also, suppose the company was started 10/1/2006. Several employees worked more than 1 hour prior to the effective date of the plan (from 10/1/06 to 12/31/06).

A Year of service for benefit accrual purposes is defined as the completion of one hour of service.

The plan provides a benefit of x% of average salary for each year of participation. Each participant has 5 years of participation.

The 415 pct of pay limit should be average salary x years of service. Can the period 10/1/06-12/31/06 be counted as a year of service for 415 pct of pay limit?

Thanks.

[SoCalActuary]

Sure it can. But not annualized pay. If someone was paid $25,000 in that short period, you don't use 25,000 x 4; you use 25,000.

[Dougsbpc]

Suppose the pay was $25,000 for 10/1/06-12/31/06, but then the high 3 average for all years of service 2006-2011 was $200,000. Then the 415 % of pay limit would be $200,000 x YOS x 10% including a year for 10/1/06-12/31/06?

Sometimes when an employer starts a business they can work 3 months and have no pay during that time and work 16 hours a day 7 days a week (oh do I remember). Of course most employers could not afford or want a DB plan for many years after that. Could that period of time be counted for the 415 % of pay purposes?

[ETA Consulting LLC]

Typically, a hour of service is defined as a hour for which the employee was paid. If there was no compensation, then the question would become whether the individual was credited an hour of service. It may be an issue of how an hour of service is actually defined under the terms of the plan; but worth mentioning.

Still a good "what if" question.

Good Luck!

[Dougsbpc]

It has always been an interesting question.

We tell all small business owners that sponsor a DB plan to take some salary even if they have not had a good year and will have to stretch to make the contribution.

Here is the definition of Hour of Service in the document:

“Hour of Service” means:

(a) Each hour for which an Employee is directly or indirectly paid, or entitled to payment. These hours shall be credited to the Employee for the computation period(s) in which the services are performed and not when paid, if different;

I think this definition of Hour of Service is a good one as it indicates that hours shall be credited during the period services are performed and not necessarily when paid if different.

[SoCalActuary]

If you are a sole proprietor and end up with a loss, you have zero compensation for that period.

If you can demonstrate that you were substantially engaged in services, such as sample work product, R&D logs, sales calls, or other activity for gain, then you should be justified in counting a year of service credit.