Compensation Used For EBAR Calculation

I'm having a tough time finding it in our document, but are you allowed to exclude compensation received prior to becoming a Plan participant in Cash Balance Plans (specifically in the EBAR calculation)?  We have it set that way for the Profit Sharing Plan, just wanted to see if we could for the Cash Balance as well?  I'm leaning no, but wanted to confirm.

EBAR is a term that only applies to testing, specifically to cross-testing contributions on a benefits basis. It is the "equivalent benefit accrual rate." Pay credits in a cash balance plan don't have an EBAR - the accrual rate is determined by the interest crediting rate and the plan's definition of actuarial equivalence.

Can you exclude pre-entry compensation when determining the amount of a pay credit in a cash balance plan? Yes - you can make any exclusion you want to compensation for this purpose, as long as your document (assuming you are using a pre-approved document) can accommodate it. Accruals don't have to be based on a 414(s) definition of compensation unless you are using a safe harbor plan design.

Can you exclude pre-entry compensation for testing purposes? If you are testing using current plan year compensation (as opposed to average compensation) then yes. This is true even if you do not exclude pre-entry compensation for purposes of determining pay credits. This is not usually something that has to be spelled out in the plan document; it is something you can elect year to year.

6 minutes ago, C. B. Zeller said:

EBAR is a term that only applies to testing, specifically to cross-testing contributions on a benefits basis. It is the "equivalent benefit accrual rate." Pay credits in a cash balance plan don't have an EBAR - the accrual rate is determined by the interest crediting rate and the plan's definition of actuarial equivalence.

Can you exclude pre-entry compensation when determining the amount of a pay credit in a cash balance plan? Yes - you can make any exclusion you want to compensation for this purpose, as long as your document (assuming you are using a pre-approved document) can accommodate it. Accruals don't have to be based on a 414(s) definition of compensation unless you are using a safe harbor plan design.

Can you exclude pre-entry compensation for testing purposes? If you are testing using current plan year compensation (as opposed to average compensation) then yes. This is true even if you do not exclude pre-entry compensation for purposes of determining pay credits. This is not usually something that has to be spelled out in the plan document; it is something you can elect year to year.

Perfect, thank you!  So if we elect to exclude pre-entry compensation, therefore any testing (including the EBAR calculation) will be based on that salary?

I just wanted to be clear, since this plan is allowing entry first of the month following the completion of six months (so we have someone entering the plan on 11/1/21)

I'm going to scratch this, as our document doesn't appear to allow entry into the Cash Balance Plan until 1 year of service.  Therefore, the only thing that will be included for 2021 is the Profit Sharing and the person will enter the Cash Balance the following year.

They'll be included in the testing, but not receive a Cash Balance.

6 minutes ago, metsfan026 said:

Perfect, thank you!  So if we elect to exclude pre-entry compensation, therefore any testing (including the EBAR calculation) will be based on that salary?

Testing elections are typically independent of plan document provisions. You can allocate a profit sharing contribution based on current year post-entry compensation and then test it using average compensation, for example, if you really wanted to.

17 hours ago, metsfan026 said:

Perfect, thank you!  So if we elect to exclude pre-entry compensation, therefore any testing (including the EBAR calculation) will be based on that salary?

I just wanted to be clear, since this plan is allowing entry first of the month following the completion of six months (so we have someone entering the plan on 11/1/21)

I would be very careful about using short service employees to generate testing results which are otherwise unavailable. The IRS doesn't like it. I think the prudent course of action would be to use full year compensation.

While moot to the original poster, a cash balance plan will generate a normal accrual rate in the same manner as a defined contribution plan will generate an ebar. The same rules on testing compensation apply.

On 2/19/2022 at 4:16 AM, Mike Preston said:

I would be very careful about using short service employees to generate testing results which are otherwise unavailable. The IRS doesn't like it. I think the prudent course of action would be to use full year compensation.

The prudent course of action would be to test by following the plan document provisions and testing regulations.  As the exclusion of pre-entry compensation is a 414(s) safe harbor, the IRS can dislike it all they want but they can't do squat about it.

They can in fact do much more than squat. And there's a difference between running the test using compensation while a participant and running a test  which passes based on compensation for the year.

19 hours ago, Mike Preston said:

They can in fact do much more than squat. And there's a difference between running the test using compensation while a participant and running a test  which passes based on compensation for the year.

Sorry, just re-read your original comment about short-service employees to pass testing, I would wholly agree in context of an 11g amendment.

Although seeing as how the IRS dislikes ROBS plans, but hasn't done squat about them; I wouldn't lose any sleep about an overreaching opinion (Gold, 2004) that they don't have the compunction to put into a formal ruling or procedure.  Besides, the Gold memo highlights plan designs that operate in that fashion on a gross basis; not one-off situations that occur infrequently, or when the majority of the non-highly paid employees are benefiting at a level that is otherwise non-discriminatory.

3 hours ago, Nate S said:

Sorry, just re-read your original comment about short-service employees to pass testing, I would wholly agree in of an 11g .

Although seeing as how the IRS dislikes ROBS plans, but hasn't done squat about them; I wouldn't lose any sleep about an overreaching opinion (Gold, 2004) that they don't have the compunction to put into a formal ruling or .  Besides, the Gold memo highlights plan designs that operate in that fashion on a gross basis; not one-off situations that occur , or when the majority of the non-highly paid employees are benefiting at a level that is otherwise non-discriminatory.

I don't disagree.  Every practitioner needs to decide how timid or aggressive they want to be in these circumstances.