410(b) coverage test for DB

[Cynchbeast]

• Our Adoption Agreements identify the last day of the plan year as the valuation date.
• Our actuary uses the first day of the plan year for the actuarial valuation and Schedule B
• On this basis, only participants on the first day of the plan year accrue a benefit

As a result, we have several participants in one calendar-year plan who entered on 07/01/13 and so did not accrue a benefit for 2013. Are these people non-benefitting participants, or can the 410(b) test be run as of the beginning of the plan year, which would make them excludable?

[shERPA]

Whether or not the participants entering on 7/1/13 accrue a benefit for '13 is a function of the plan document, not the valuation. What does the document say?

[Cynchbeast]

Thank you. So tell me, if the actuary does his valuation as of 01/01/13, what does that mean to you? Is he supposed to only use asset values as of 01/01/13, or does he also determine benefits as of that date, not the plan year end?

Any actuaries out there?

[My 2 cents]

1. Benefit accruals and the calculations underlying the actuarial valuation are two separate things. Inclusion in the actuarial valuation does not lead to benefit accruals and exclusion from the actuarial valuation does not lead to there being no benefit accruals. The accruals are based solely on the plan provisions. Remember, as it is a defined benefit plan, money does not need to have been set aside in order for a participant to accrue benefits.

2. Is it not the case that, for a defined benefit plan, "valuation date" as defined in the plan document is relevant only for top-heavy testing purposes, and isn't it generally defined as the last day of the plan year?

3. A substantial percentage of defined benefit plan actuarial valuations are performed on the first day of the plan year (certainly, no plan covering more than 100 participants can do otherwise). Only people who are participants on the first day of the plan year are generally assumed to accrue a benefit furing the year (for purposes of calculating the target normal cost for the plan year). If a plan allows people to become participants during the plan year, they would actually accrue benefits, at the very least, with respect to service on or after their plan entry dates if not for all service since hire, whether there was recognition of them in the actuarial valuation or not.

[david rigby]

2. Is it not the case that, for a defined benefit plan, "valuation date" as defined in the plan document is relevant only for top-heavy testing purposes, and isn't it generally defined as the last day of the plan year?

That's my understanding. Per IRC 430(g) and Reg. 1.430(g)-1, the valuation date (ie, for purposes of measuring liability, normal cost, and assets) is part of the funding method. As such, the plan cannot define it.