Is this Safe Harbor compliant?

[Guest DBStudentAct]

Just taken over a sole participant (owner-only) DB plan. The plan has NRA of 62 years.

As at 1/1/2012, participant's AA was 61 years and years of service as participant were 9.

While going through the plan documents I noticed that the accrued benefit formula was as follows:

100% of average compensation * completed YOS as a participant/YOS as a participant at NRA

In this case participant's YOS at NRA would be 10.

Does this satisfy the 401(a)(4) safe harbor section?? Most other plans I have seen (in my limited DB plan exposure) have had a denominator of atleast 25. Or since this is a owner-only plan it can get away with this benefit formula??

Thanks for your help in advance!!

[AndyH]

It is a potential variant of a safe harbor often called the "alternative flat benefit safe harbor".

It is subject to a fairly simple test that is contained in regulation 1.401(a)(4) which essentially compares the accrued benefit fractions for NHCE and HCEs. If there are no NHCEs then it would pass any nondiscrimination test including this one. So, it would satisfy the requirements to for the alternative flat benefit safe harbor.

[Mike Preston]

The previous answer is buying into a false premise. The OP is asking whether this particular formula can be "gotten away with" because it is an owner only plan. The previous answer gives a technically correct answer that the formula satisfies one of the safe-harbor formulas because of demographics.

What should be said, however, is that in the case of an owner-only plan there is no requirement to satisfy any of the tests under 401(a)(4) so the fact that it technically conforms to one of the safe harbors is irrelevant.

Stated another way, even if the formula and demographics did not satisfy any of the 401(a)(4) safe harbors, the plan would still not fail to satisfy 401(a)(4) because 401(a)(4) just simply does not apply.

[AndyH]

Mike, for my information, where in the law is the exemption?

[SoCalActuary]

Mike, for my information, where in the law is the exemption?

Andy, the immediate "uncommon sense" answer is that the EBAR for NHCEs is 0/0, an impossible item to test. So there is no discrimination under 401(a)(4) because no NHCE fails the test.

[AndyH]

I'm certainly aware of the testing rules; I thought this was a document question. Well, half the solution to any problem is understanding the question I guess.

[Mike Preston]

I think we are arguing semantics as I'm pretty sure we all agree.

But the logic I was referring to is that the tests under 401(a)(4) all boil down to whether each rate group satisfies 410(b). [see 1,401(a)(4)-3©(1)]. 1.410(b)-2(b)(5) is the citation that allows an employer that has no NHCE's to satisfy 410(b). Hence, it doesn't matter whether the document formula satisfies one of the safe-harbors of 1.401(a)(4)-3(b) or not.

[Draper55]

clearly it will satisfy the general test on a contribution or benefits basis

so i agree that the safe harbor design aspect is irrelvant.

[AndyH]

"so i agree that the safe harbor design aspect is irrelvant."

I guess this is what they call an "academic" discussion.

"I think we are arguing semantics "

I'm not stupid enough to argue with E.F. Hutton