415(c)(3) Compensation for Gateway Testing

[Young Curmudgeon]

Is it accepatable to use average compensation for this?

I have a DB/DC combo where the current year compensation if far less than the average on which the DB benefit is based. If I have to use current year compensation for testing, my gateway requirment is going to jump from 5% to 7.5%.

[John Feldt ERPA CPC QPA]

No. Average compensation may be used for nondiscrimination testing per 1.401(a)(4)-3(e)(2), but the minimum gateway requirement (assuming it applies) is based on current compensation.

So, for example, if you are testing a DB plan and a DC plan together as a tested "plan", and the highest HCE rate is 31%, then your aggregate gateway under 1.401(a)(9)-(b)(2)(v)(D)(1) is 7% of compensation, not 7% of average compensation. This can be offset as described in 1.401(a)(9)-(b)(2)(v)(D)(1) by the average actuarial equivalent of all the NHCEs benefiting under the plan.

[Young Curmudgeon]

So just to confirm, since my DB benefit based on past average compensation is 110% when tested against the current 415©(3) compensation, I'm immediately pushed to the 7.5% gateway requirement. Is this viewed as a mistake in the way the code was written or nefarious intent by the IRS?

[Mr. T]

Sounds to me like the "nefarious intent" is on the part of the owner taking a benefit based on a high past comp and then complaining because he has to give a few clams to his employees. Maybe they should look us up to see if there are any other wrongs we can help with.

He's been earning a much higher benefit than his current comp will support, therefore, he needs to satisfy the gateway. This is one of those things the rules are designed to slow down.

So I wouldn't call it a "mistake in the code" - its purpose is fairly clear.

[Young Curmudgeon]

That is a fair point if you believe that is the sponsor's intent. What is unfortunate is that it generates a 25% increase in benefit costs in a year where revenue is already down. The part that seems nefarious to me is in this case, the regulation backs a plan sponsor into a corner because of an unforseen business downturn.

[Mr. T]

If things are so bad, he can always lower his accrual. It may not help for the year in question, but it would certainly avoid the problem in the future. I doubt the gateway he is giving to the employees is more than the value of his increased db accrual, plus the ps he is giving himself, based on his current comp.

Sorry, I still aint got no pity for da fool.