new comparability regs have been released

[Guest]

http://www.benefitslink.com/taxregs/1.401a...-proposed.shtml

Basically (and this is really simplified, so take a look at the actual wording):

the new regs effective 1/1/2002

minimum is lesser of 5% or 1/3 the rate of the allocation rate of the HCE (in a 401(k) plan an HCE defers 10,000 and receives 20,000 profit sharing. 20,000 / 170,000 = 11.76%, so minimum is 1/3 of that or 3.92%.

There are are other options for combo DB and DC plans, as well as what is called broadly available allocation rates.

e.g. lesser of 5% or 2 times. if one age group is 6%, then the rate for the next group is capped at the lesser of 11%(6% + 5%) or 12% (6% * 2) The age bands for the groups must be the same length.

Anyway, its only 11 pages

[John A]

Tom, thanks for a really decent brief summary.

These questions come to mind as I read through the proposed reg:

1. Can plan sponsors rely on these proposed regs immediately? (I did not see anything that said yes or no, so my understanding of proposed regs in general would be yes. However, since the reg would not be effective until 1/1/2002, perhaps this does not matter.)

2. For any plan sponsor who wishes to adopt a new plan or amend an existing plan to be a new comparability plan, should the proposed reg rules be written into the document, or should this be delayed until the reg is finalized?

3. Does the compensation definition used to determine the allocation rate have to be the same as the compensation definition used for the 5%?

4. In the "broadly available separate plan" requirement, what does "assuming satisfaction of the average benefit test" mean? Does this mean that you start with the assumption that the aggregated plans pass the average benefit test (even if actual testing would show they did not meet the ABP test), and then test each plan separately under 401(a)(4)?

Despite the questions, the reg seems to me to be a reasonable proposal.

[Guest]

I'll take a stab at answering, perhaps 1/2 of one of your questions....

we are getting ready to restate all our plans for SBJPA and all that.

ok, guess thats about as far as I can get without asking the boss.

I don't know if the language has to be in the document like you do for a top heavy minimum

e.g. in no case will ees will receive lesser than

:the lesser of 5% or 1/3 the alloaction for the HCE receiving the highest rate

perhaps its a matter of 'testing'...my document doesn't tell me how to calculate an E-Bar, but I know how to do that. In the same vein, maybe as part of testing, I simply make sure each NHCE receives the 5%.

on the other hand, the language is in the document for top-heavy and ADP testing, so i can see an argument for it being required in the document.

maybe all that is necessary is to refernce the proposed reg.

The easiest solution is simply ask Corbel or whatever other document provider you are using clarify what is needed.

[IRC401]

The percentage of compensation needed to pass the "Gateway" test is based on 415© comp, not on the definition of comp that the plan uses for allocations or benefits.

[John A]

IRC401,

It is clear to me that 5% of 415©(3) comp is one part of the gateway.

What is less clear to me is what compensation (plan comp or 415 comp) should be used to determine the allocation rates (for 1/3 of the allocation rate of the HCE with the highest allocation rate). Must the allocation rate also be based on 415©(3) comp?

[AndyH]

Good questions. I don't have the answers, just more questions. Here's one:

Who must receive the 5% or 1/3? I don't have the reg in front of me but I think it said something like all "NHCEs in the plan". I'm not sure what that means. What if the plan has a last day requirement, so an NHCE who is "in the plan" gets nothing?

Does it mean that the lowest rate group allocation must be 5%, or is it a minimum for any non-excludable person? Then, if it's a 5% by rate group, it seems that comp must be as described above, not just a 414(s)-acceptable comp definition.

Good thing we have 2 years to figure this out.