Safe Harbor for past service credits limited to five years

[401_noob]

Good morning cyber friends!

I have a quick question for you to help clarify something I've come across in my DC 1 book. It is in the Plan Amendments and Terminations section (Chapter 10) and deals with nondiscriminatory amendments. It goes on to say that the establishment or termination of a Plan is treated as an amendment. A subsection of the establishment of a Plan says that there is a Safe Harbor for past service credits limited to five years. "If a Plan amendment credits years of service for past periods to determine benefits, the amendment is deemed to be nondiscriminatory if no more than five years of past service is credited, the past service is granted on a reasonably uniform basis, and the service can be taken into account under service crediting rules of TR §1.401(a)(4)-11(d)(3).

Say what?!?!

Does this mean that a start-up Plan can only credit prior years of service for vesting benefits for the prior five years, or is this talking about contributions based on service (not applicable under a 401(k)/PS Plan)?

The example in the book talks about establishing a DB plan, but the book is about Plan Qualification and Compliance, and a 401(k)/PS plan is a qualified Plan...

I guess I am looking for clarification on how to apply this correctly.

Thanks in advance!!!

[ETA Consulting LLC]

I was thinking "DB" when you first asked the question.  Past Service "to determine benefits" is referring to a plan formula where the benefits are determined by the years of service (i.e. like in DB plans).  Vesting is based on years of service with the company.  So, if you already have 10 years of service, then you'll be 100% vested.  Of course, there are some allowable exclusions for service used for vesting (i.e. prior to age 18, prior to establishment of plan), but the past service issue deals more with DB plans. 

Good Luck!

[My 2 cents]

Not sure how this interacts with DC plans where the contribution formula ratchets up as service increases.  Of course, there would be no "extra" contributions for years of service prior to the creation of the plan, as is often done when a new DB plan is created.

[AndyH]

This is a DB, not DC, issue.

[401_noob]

Thank you all for your input. I guess that explains why I've never run into this rule before as I don't have any interactions with DB plans.

Maybe one day!

[ETA Consulting LLC]

58 minutes ago, 401_noob said:

Maybe one day!

Good Luck!  I'm convinced that actuaries are geniuses.  I've always been good at math and statistics, but they take it to another level :-)