Allocations and Testing Methods for post NRA participants

[AndyH]

I'd appreciate some feedback on how others handle certain situations for post NRA people, for both allocations and (a)(4) testing if needed.

Assume an age weighed PS plan where everyone gets a contribution equal to the PV of 1% of pay. Assume NRA is 65 and a participant became eligible at 65 and is now 66.

Is the contribution for the 66 year old equal to or less than the contribution for a 65 year old? In other words, what annuity rate is used for the PV calculation, age 65 or age 66? My interpretation is that it can be done either way (provided the document does not specify, which is the case with one I'm dealing with.) Is this correct?

Is it correct that the contribution for someone age 66 cannot exceed the contribution for someone age 65 assuming the same pay level? (This gets to the procedure for normalization.)

How would this be tested for (a)(4)? Seems to me you would ordinarily use an age 66 APR, resulting in a higher EBAR for a 66 year old than a 65 year old, even though the contributions are the same, but that there is an exception in (a)(4) which seems to say that test failure for this reason alone can be ignored.

What do others use for the Annuiity Rate for post-NRA people, i.e., NRA or Attained Age for cross testing in general?

Would the answers be different if the person entered the plan at age 66, i.e. would this be their NRD and therefore test age, or would it be 65?

The target benefit safe harbor rules seem specific on these points, but there appears to be room for interpretation on other plans. Feedback would be appreciated.

[Guest mo again]

You have a lot of questions there, AndyH!

I think most of them can be answered by looking to subparagraph (4) of the definition of testing age in 1.401(a)(4)-12:

(4) If an employee is beyond the testing age otherwise determined for the employee under paragraphs (1) through (3) of this definition, the employee's testing age is the employee's current age. The rule in the preceding sentence does not apply in the case of a defined benefit plan that fails to satisfy the requirements of §1.401(a)(4)-3(f)(3)(i) (permitting certain increases in benefits that commence after normal retirement age to be disregarded).

So for a participant whose current attained age exceeds the testing age, the straight life annuity factor is that for the testing age, not the current age. The allocation amount to which the annuity factor is applied is not subject to any interest adjustment. The equivalent annuity for the individual is simply the allocation amount divided by the annuity factor for the testing age

[AndyH]

Thanks for the feeback, Mo. I agree the cite is relevant, but I read the same cite and reach the opposite conclusion.

I think it says use the age 66 factor ("the employee's testing age is the employee's current age") which in my example is age 66, which is of course a lower annuity rate and therefore higher EBAR.

If you agree, then I'm back to the initial problem, which is that a contribution for someone post 65 has a higher EBAR than age 65, or in the case of an age based ps plan produces a lower contribution for someone age 66 than age 65, except this can be ignored for a(4) testing. Agree?

[Guest]

I definitely think the testing age is 66. I don't think you can get around that.

however, that doesn't answer the initial question - when solving for the contribution what do you use.

I actually talked to someone who had a document that cleary said you used NRA in determining the contribution. This gave the individual a larger contribution, but caused the plan to fail the nondiscrim test because of the testing age. In this case the ee was already 69 (if I remember correctly)

I told them to impute permitted disparity when testing to get the plan to pass.

technically you could have an age weighted plan that is integrated, so you can impute when testing. What a great article it was - I think you can get an owner an extra $50 by using disparity. I never did figure out all the calculations, but agreed with the authors conclusion it wasn't worth the struggle to calculate the contribution that way.

Anyway, you indicated that the plan was 'silent' on how to handle the age 66 contribution (definitley determinable formula violation?).

If you treat the individual as age 66 it does appear he will get a smaller contribution than someone age 65. But then your E-Bars should be the same.

Hopefully the contribution is large enough the ee will get 25% of pay anyway and it wont matter.

I know you can't cut back on a benefit for someone who continues working past retirement, but its the pv that is causing the contribution to be reduced so I think its ok.

maybe I am just rambling. somewhere in the back of my mind I remember reading something about how to handle a scenario like this, but darned if I remember.

[AndyH]

Thank you for your comments, Tom. What you said is actually right on point.

The language in the document arguably says use the age 65 factor for post 65 people. It is less than clear, but that's our read.

In the case which prompted my question, it was an owner past 65. Using age 65 for the contribution (or annuity factor) would create a higher EBAR for (a)(4). It would flunk (a)(4), as in the example you've described.

There is an exception in (a)(4) that says something to the effect that such a result will not cause failure by itself. I don't have the cite in front of me, but it's clear.

This leads into many side issues which I deal with, such as plans with more than one failing rate group, plans that have 65&5 years of participation as NRA, DB general testing procedures, etc. so I was looking for as much feedback on these issues as possible, which is why, as Mo correctly pointed out, I asked many questions.

Anyway, thanks again. Any further comments on these issues from anyone who deals with this stuff would be welcome.