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Accrued To-Date Testing


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start-up Combo (CB and PS) Plans with 1/1/2023 effective date.  Owner started his business back in 2017.  Employees have been hired in 2021 and 2022.  Whar are the issues to rely on Accrued-To-Date testing method for this situation to pass 2023 tests?

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There is no issue with using accrued to date testing, but in the first year with a typical cash balance/profit sharing combo, it's going to be equivalent to doing annual testing. You only count years in which the employee was eligible to accrue a benefit under the plan, so unless you have a DB plan that grants accruals for prior years of service, your years for accrued-to-date testing are just years of participation, which will be 1.

Free advice is worth what you paid for it. Do not rely on the information provided in this post for any purpose, including (but not limited to): tax planning, compliance with ERISA or the IRC, investing or other forms of fortune-telling, bird identification, relationship advice, or spiritual guidance.

Corey B. Zeller, MSEA, CPC, QPA, QKA
Preferred Pension Planning Corp.
corey@pppc.co

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You can start with an opening account balance for a past service benefit, but past service is limited to a safe harbor of 5 years, otherwise must be nondiscriminatory. However, you need to align the DCP and test balances accumulating from the same date. 

Note that if you use prior service to "dilute" current high HCE credits, the impact of that dilution decreases dramatically each subsequent year, so it's not the best longer term strategy to pass testing. That said, it might be a quick fix for year one and possibly year two testing, if you're using an OAB to bump HCE(s) up or waiting on young new NHCEs to become eligible and help pass annual accrual testing.

Kenneth M. Prell, CEBS, ERPA

Vice President, BPAS Actuarial & Pension Services

kprell@bpas.com

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that is exaclty right - have few "good" NHCEs entering the Plan in 2024 and 2025.  How does one define an OB in relationship to the past service?  Has it ever been presented at NIPA/ASPPA/CCA meetings?

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1 minute ago, truphao said:

Has it ever been presented at NIPA/ASPPA/CCA meetings?

I don't know. 

The other issue, still have an initial 415 limit of 1/10 the dollar limit as of 1/1/2023 and 12/31/2023 (assuming it's higher than prorated comp limit), which could make defining the OAB and ongoing credit a challenge.

 

Kenneth M. Prell, CEBS, ERPA

Vice President, BPAS Actuarial & Pension Services

kprell@bpas.com

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How did you define the opening balance? If it was something like $Y x (past service not to exceed 5 years) than I would argue you could use up to the past service grant in the accrued to date testing. But I don't know if that would pass muster with an IRS agent, though I could see making a good argument for it.

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That has more options that what's in the Corbel Document.

You have "other checked" but it doesn't say what "Other" is. It looks like if you are using B.3. or B.4 you could make a great case for accrued to date based on those included years.

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If your service is used to calculate the benefit then you can use it in your testing. 

Kenneth M. Prell, CEBS, ERPA

Vice President, BPAS Actuarial & Pension Services

kprell@bpas.com

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