401(a)(26) Test ?

[Cloudy]

I have a CB plan that failed 401(a)(26) when testing the current year accrual. A couple of years ago the plan reduced the rank and file participants pay credit from 9.5% to 4%. Although I have never needed to use it, I believe that I could do accrued-to date testing for the purpose of passing 401(a)(26). Is that correct?

[My 2 cents]

I have a CB plan that failed 401(a)(26) when testing the current year accrual. A couple of years ago the plan reduced the rank and file participants pay credit from 9.5% to 4%. Although I have never needed to use it, I believe that I could do accrued-to date testing for the purpose of passing 401(a)(26). Is that correct?

Trying to guess what is going on here. Are you sure you mean 401(a)(26) and not 401(a)(4) or 410 testing or something like that? 401(a)(26) just looks at the percentage of employees who are earning meaningful benefits, without regard to whether this person's benefit is better than that person's. I don't think that 401(a)(26) testing involves accrual percentages, especially on an accrued to date basis. If you mean 401(a)(26), perhaps the 4% cash balance pay credit is too small for too many people to result in enough people earning an accrued benefit at retirement age as large as 0.5% of this year's compensation (an accrual big enough to provide 0.5% as a periodic benefit at retirement age being the threshold for meaningful accruals).

[John Feldt ERPA CPC QPA]

To determine if employees have accrued a meaningful benefit, it is my understanding that the average benefit accrued over the participants years could be used for purposes of the calculation. Also, it is my understanding that a fresh-start calculation could be applied.

[Effen]

I wouldn't get too bunch up about it. If you are giving 4% of compensation I can't see how the IRS could argue that isn't "meaningful", regardless of the .5% stuff. (Assuming you aren't using a document with the .5% hardwired into the formula.)

The DC top heavy minimum is only 3% so it would be interesting to hear them say 4% isn't meaningful.

[My 2 cents]

It's a cash balance plan, which is a defined benefit plan. It could be that a 4% pay credit for a 50 year old rank and file employee is only enough to accrue a 0.25% of pay monthly benefit at retirement age. Perhaps the plan's interest credit rate is stingy (one-year Treasury rate?). Meaningful, for a defined benefit plan, would presumably be measured in terms of the periodic benefits that would accrue and not the hypothetical contributions to the hypothetical cash balance account.

Of course, the original post lost me at "...reduced the rank and file participants pay credit...", which sounds to me like blatant discrimination in favor of the highly compensated employees.

[Mike Preston]

I, for one, find Cloudy's original post unambiguous. The R&F used to get more than they get now. This is relevant because it implies that ATD will give better results. We have to assume that the lower R&F pay credits are taken into account in a4 testing and since Cloudy is supremely uninterested in a discussion of a4 that a4 testing is satisfied.

I think Effen's position is aggressive and that most adopt 2cents' approach that the pay credit, itself, is irrelevant, and instead look to the 0.5% accrual for a26 testing. But, it most certainly is a facts and circumstances determination and if Effen is willing to fight that battle, I'd gladly watch.

I agree with John that ATD can most certainly be used when a26 is tested.

[Effen]

"if Effen is willing to fight that battle, I'd gladly watch" - I hear there are people on Craigslist who will actually pay for that.

[AndyH]

Effen, Congratulations, I'm not sure I remember Mike calling anybody else's comments aggressive!

[Cloudy]

Mike's interpretation of the facts are accurate. I am only concerned with the a26 test meeting the .5% standard for the 50 / 40% passing mark. Coverage and nondiscrimination testing are not a problem. I appreciate everyone's help, thanks.

[Effen]

Just for the record, I do not disagree with Mike's position and agree the IRS can raise the issue based on the Schultz memo. But, based on my experience, where we typically give a 3% minimum, they very rarely ask for additional details around (a)(26) compliance.