SB FT vs FT for maximum contribution etc.

[SSRRS]

Hi 

Thank you, as usual, for all the insights.

A traditional DB plan is being audited by the IRS.

1. It appears from the questions being asked on the IDR, that the one asking the questions is not well versed in traditional DB plans or in DB plans in general. 

As they ask ...that the FT shown in the val report on the maximum contribution page is 1,846,234 is different  than the FT shown on the SB of $1,345,367. 

The answer is that the SB shows the FT for the minimum funding requirements, while the FT on the val report in the  maximum contribution section of the val report is based on the 404(0) rates for the maximum allowable contribution.

There is indeed, a section in the val report that shows the FT for the minimum funding and it properly matches the FT shown in the SB.

 

2. They ask to provide a demonstration  of how the plan provides meaningful benefits required by 401(a)(26).

In a memo for EP determinations  on 7/17/2007 (and Paul Shultz?) The IRS confirms that a benefit accrual of 0.5% per year of participation or service is meaningful...thus...a traditional DB plan that has a benefit formula of 0.5% of average compensation times credited service has a “meaningful benefit”. 

This plan under audit has a benefit a formula of 3% of avg. comp per year of year of service limited to 10 years. 

Question: Since the formula is 3% per year of service  shouldn't this mean that the plan provides meaningful benefits?

3. They ask how the plan satisfies the nondiscrimination in amount requirements of 401(a)(4).

A DB plan that uses a safe harbor formula satisfies 401(a)(4).

This pla uses a SH formula...

As it is the same formula for all employees, calculated based on the same number of service, and does not exceed 100% of comp.

It uses a uniform accrual formula..benefits accrued at a consistent rate for all.. ...3%per year of service.

Question: Therefore based on this, doesn't this plan meet the 401(a)(4) non discrimination in amount by design, and does not need annual testing?

Thank you very much for any insights on this.

[CuseFan]

These questions usually come from a checklist and are likely generic and all the same for a type of plan. 

Just provide the information requested - even if obvious, like meaningful benefits and a safe harbor formula (remember, compensation definition must be a SH as well). Then the auditor can check off their boxes.

[david rigby]

To be clear, the term "meaningful benefits" does not appear in the 410a26 statute.  It does appear in the regulation at § 1.401(a)(26)-3.  Subsection (c)(2) includes the text:

Quote

Whether a plan is providing meaningful benefits, or whether individuals have meaningful accrued benefits under a plan, is determined on the basis of all the facts and circumstances. The relevant factors in making this determination include, but are not limited to, the following: the level of current benefit accruals; the comparative rate of accruals under the current benefit formula compared to prior rates of accrual under the plan; the projected accrued benefits under the current benefit formula compared to accrued benefits as of the close of the immediately preceding plan year; the length of time the current benefit formula has been in effect; the number of employees with accrued benefits under the plan; and the length of time the plan has been in effect. ...

The Paul Schulz memo might have effect on how IRS employees approach their job, but it has no specific authority over any plan design.

[SSRRS]

Thank you very much CuseFan. As always your sharp and analytical mind is appreciated.

I just want to be sure. I was clear in my question (I hope i was)

The IRS confirms that a benefit accrual of 0.5% per year of participation or service is meaningful...thus...a traditional DB plan that has a benefit formula of 0.5% of average compensation times credited service has a “meaningful benefit”. 

This plan under audit has a benefit a formula of 3% of avg. comp per year of year of service limited to 10 years. 

Question: Does the fact that this plan's formula of 3% of avg comp per year of service, includes  limited to 10 years ( 3 % per yr of service , limited to 10 years of service), possibly make the benefits not meanigful and testing would be needed...and only if the formula would be 3% per year of service, would it be automaticly meanigful benefits? 

Or even if the 3% per year of service includes , limited to 10 years of service, it is still meanigful benefits, since it is providing at least 0.5% per year of service?

Thank you!

[C. B. Zeller]

Two things:

1. The definition of benefiting in the 401(a)(26) regs points to the definition in the 410(b) regs. The 410(b) regs say that you are still considered to be benefiting even if you don't accrue a benefit, if the reason you don't accrue a benefit is solely because you hit the maximum number of credited years of service under the plan. So in your case, somebody who has been at the 30% cap for a few years would still be considered benefiting under 401(a)(26) even though they didn't have an increase in their benefit.

2. Meaningful benefits can be demonstrated on an accrued-to-date basis. If you (or more importantly, your IRS examiner) accept that 0.5%/year is meaningful, then an employee would have to have over 60 years of service for 30% to be less than a meaningful benefit.

[david rigby]

I've seen many, many plans that define the benefit as $ x Service, one of them as low as a $5 multiplier.  NOT union plans.  Some of these are approximately equal to a compensation-based accrual rate of about 0.25%.