Fresh start with wear away

[rodin111]

Plan sponsor has active defined benefit and profit sharing plan. At present time both plans are safe harbor (same accrual rate/allocation for all participants)

Starting 2016 the DB plan will amend the formula to 5% X avg comp X years of service for the HCEs and 0.5% X avg comp X years of service for NHCE.

All benefits accrued tio the date of change will be preserved (frozen), etc.

Using the fresh start with wear away, some of the participants will not accrue any benefits until the benefits accrued under the new formula will equal the frozen accrued benefits.

The DB and PSP will be aggregated for testing purposes.

The profit sharing allocation for NHCEs will be whatever is needed to pass the aggregate discrimination tests.

Question:

In the discrimination tests; should the participants that do not accrue benefits due to the wear away be considered as benefiting (0.5%) or non-benefiting due to the fact that practically they do not accrue a benefit during the year?

We are using current year accrual method for discrimination testing.

Help is greatly appreciated.

[Andy the Actuary]

Benefiting In general, an employee is treated as benefiting for the purposes of the coverage tests, only if the employee receives an allocation of contributions or forfeitures, or accrues a benefit under the plan for the plan year. However, employees are treated as benefiting if they fail to receive an allocation of contributions and/or forfeitures, or to accrue a benefit solely because the employee is subject to plan provisions that uniformly limit plan benefits, such as a provision for maximum years of service, maximum retirement benefits, or application of offsets or fresh start wear-away formulas.

[rodin111]

Thank you Andy

Your answer seems to imply that indeed, for all discrimination tests, the participants not accruing benefits for the year solely due to th wear away limitation, are to be considered as benefiting. Therefore the equivalent accrual rates in the aggregated DB/DC will include the DB accrual based on the formula after the fresh start. Even though IN REALITY they are not getting the accrual.

Is my understanding correct?

[Andy the Actuary]

Not my answer but from IRS Publication 6393

[AndyH]

"Therefore the equivalent accrual rates in the aggregated DB/DC will include the DB accrual based on the formula after the fresh start. Even though IN REALITY they are not getting the accrual."

Not sure what this means. Please clarify.

What test are you doing? If it is the general test under 401(a)(4), and you are using the "annual method", the accrual is the difference between the end of year and end of prior year accrued benefit. And the accrual rate is that amount divided by testing comp.

[rodin111]

So, the equivalent accrual rate will be 0% for participants not accruing benefits until they catch up with the frozen benefit as of the fresh start date. At least under the "annual accrual method"

Is my understanding correct?

Thank you Andy.

[Andy the Actuary]

If their change in benefit under the DB Plan is $0, then your conclusion is consistent.. But you're aggregating . . .

[AndyH]

The DB part would be 0 yes.

[rodin111]

Thank you.

Just wanted to make sure....