A good source to learn about New Comparability?

[Lori H]

Seminars?

Literature?

Books?

Thanks for any ideas.

[Soundbc1]

How about the regs? They are fairly straight forward.

How come we continue to call it "New" when it has been around since TRA 86?

[Mike Preston]

Because it isn't "old comparability"!

Before the updated 401(a)(4) regulations were published circa 1991 plans could establish comparability using Rev. Rul. 81-202. Hence, comparability pursuant to the updated 401(a)(4) regulations were dubbed "new comparability" to differentiate from RR 81-202 comparability.

It is still "new" (or at least "newer") when compared to RR 81-202 comparability.

The absolute best, most thorough method to immerse yourself in all that is non-discrimination testing would be Larry Deutsch Enterprises' Non-discrimination Testing Symposium. Day 1 of the symposium is spent on material that might best be described as "New Comparability 101 and more".

mike

[Tom Poje]

if you can understand the 'concept' of an E-Bar, I firmly believe you are well over 90% of the way there.
this is how I explain it (I have an old powerpoint from an asppa presentation I did so it wasn't hard to copy this info)

Bob, age 60, receives a $44,000 contribution. He makes $220,000 a year.
Not bad, 20% of pay. What is his E-BAR?
Using an interest rate of 8.5%, what will that 44,000 grow to at retirement age?
• Age 61 = 44,000 * 1.085 = 47,740
• Age 62 = 47,740 * 1.085 = 51,798
• Age 63 = 51,798 * 1.085 = 56,201
• Age 64 = 56,201 * 1.085 = 60,978
• Age 65 = 60,978 * 1.085 = 66,161

66,161 is the lump sum or future value.
So at retirement he will have over $66,000
Mathematically speaking, this could be written as
44,000 * (1.085)^5
• Or, generically speaking
(contribution * interest assumption for however many years to retirement remain)

n*(1.0I ) yrs to retirement
where n= contribution
I = interest assumption (must between 7.5% and 8.5%)
The APR for 1983 IAF at 8.5% interest is 115.39
you might see this expressed as 9.6158. The first figure is for monthly annuity, the second figure is annual (Depending on which mortality table is chosen the rate will be different, but in most cases it becomes a constant across the board so don't worry about that)

• Balance = $66,161
• To translate this to a benefit, simply divide by the APR (Annuity Purchase Rate)
• 66,161 / 115.39 = $573.37 a month [monthly benefit]
• Or, an annual amount of 12 * 573.37 = 6880.44
So what percentage of pay is that?
• 6880.44 / 220,000 = 3.127%

• Congratulations. You have just calculated an E-BAR!!!!
• In other words, a one-time total contribution of $44,000 (20% of pay) to this individual at age 60 will provide an annual benefit of 3.127% of pay for life at age 65.

[if you tell me you understand that concept, then you can go to the next step (at least in my opinion) as to why new comparability works]

[Tom Poje]

Lesson 2
so building on that concept


Contr *(1.085^yrs to retire)/APR /comp = ebar
But contr = comp * % of pay
So substituting
Comp * (% of pay * 1.085 ^ yrs to retire) / APR /comp = E Bar

But you have comp on top and comp on bottom so those cancel out.
Assuming everyone retires at the same age the APR is the same for everyone so that can be eliminated.
So now the basic formula becomes [this is not an e-bar, but ultimately explains why cross testing works]
% of pay *( 1.085^ yrs to retire)

So to max an owner (age 60) with max comp takes a 20% contribution. (e.g. 20% * 255,000 = 51,000)
The basic stripped down formula yields
20% * 1.085 ^ 5 = .3007
The gateway minimum is 5% so what age must the NHCE be to be in the rate group?
5% * 1.085 ^ ? = .3007
The answer is 22 years to retirement because 1.085 ^ 22 = 6.018
And 5% * 6.018 = .3009 which is slightly greater than the HCE value. that is all you want. if it was less, then you simply increase the % of pay to the NHCE until you reach that value.
If you have an owner at age 60 and an nhce age 43 (or younger, you are guaranteed of someone in the rate group. And if you have enough NHCEs in the group you pass.
This is a simple case, 1 HCE at max comp and the desire to provide the absolute minimum.
No deferrals. (or another way of looking at it, if there is a 17 year difference between the owner and the NHCEs this will work. E.g. if owner had 6 years to retire then you need NHCEs age 42 or younger…etc.

...........

those are the most important concepts (in my humble opinion) to understand why the whole things work.

everything else build and follows on those ideas.

[John Feldt ERPA CPC QPA]

Once you get a feel for how this works, however, I agree that the Larry Deutsch Enterprises' Non-discrimination Testing Symposium is very much worth the cost to attend. It was exremely worthwhile for me anyway. Now with another portion of the cash balance regulations being finalized, I am considering attending another (so I can ask a bunch of questions).