C. B. Zeller Posted May 3, 2018 Share Posted May 3, 2018 I recently received a cash balance plan that defines the accrued benefit as the actuarial equivalent of the hypothetical account balance (where the hypothetical account balance is the usual sum of principal and interest credits), reduced by the actuarial equivalent of the balance of the "hypothetical offset account." The plan states that the hypothetical offset account for each participant is credited with an allocation equal to the lowest allocation rate from [Sponsor Name] Profit Sharing Plan plus the actual rate of return from the participant's account in the profit sharing plan. The profit sharing plan uses a new comparability allocation formula with each participant in their own group. In past years, the owner received a contribution equal to the 415(c) limit, and the non-HCE received the minimum gateway, let's say it was 6%. The profit sharing and cash balance plans satisfied the numerical tests for coverage and nondiscrimination when tested together. The idea behind this design seems to be that although the participants are not getting a uniform allocation in the DC plan, they are getting a hypothetical uniform allocation in the form of the hypothetical offset account, and it is that account balance which is being used to offset the accrued benefit. In other words, even though the owner is really getting a 20% allocation in the DC plan, his balance for purposes of the offset is based on only a 6% contribution since that is the lowest allocation rate of any participant in the DC plan. My concern is whether this arrangement satisfies the minimum participation requirements. 1.401(a)(26)-5(a)(2)(iii)(A)(2) states that the formula meets the requirements if "The employees who benefit under the formula being tested also benefit under the other plan on a reasonable and uniform basis." The word "plan" here concerns me as I do not think that a hypothetical offset account constitutes a plan. Nor do I think there is any permissive disaggregation rule that would allow that portion of the employer nonelective source which is attributable to contributions not in excess of a certain allocation rate to be considered its own plan. This plan does not have a determination letter. Has anyone ever encountered this type of plan design before? Does this seem permissible? 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, QKAPreferred Pension Planning Corp. corey@pppc.co Link to comment Share on other sites More sharing options...
figure 8 Posted May 4, 2018 Share Posted May 4, 2018 There was an ACOPA webcast on floor offsets a little over a year ago. In that webcast, they used an example very similar to your case. Their conclusion was that even though there is no written guidance, the IRS has informally said this passes the reasonable and uniform test, and there are many of these plans with determination letters. Link to comment Share on other sites More sharing options...
Doc Ument Posted May 4, 2018 Share Posted May 4, 2018 Although not exactly on point (in the case of a hypothetical offset), the language in any preapproved PPA cash balance floor-offset plan document is extremely likely to contain language similar to the following in the case of an actual offset of amounts allocated to participants under the employer's DC (exclusive of K or M allocations, which cannot be offset): T he benefits provided under this Plan shall be no less than the amount needed to provide an accrued benefit under this Plan equal to the actuarial equivalent, at normal retirement age, of 0.5% of compensation for each year of credited service under this Plan. Rev. Proc. 2015-36 (section 16.03(7)(g)(vi)) Link to comment Share on other sites More sharing options...
C. B. Zeller Posted May 7, 2018 Author Share Posted May 7, 2018 Thanks @figure 8 . I'll see if I can look up the webcast. Do you recall by any chance if there was a rev ruling or anything I could reference even for informal guidance? 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, QKAPreferred Pension Planning Corp. corey@pppc.co Link to comment Share on other sites More sharing options...
figure 8 Posted May 7, 2018 Share Posted May 7, 2018 I don't believe so. I think they just said the IRS has informally said this is okay, and that there are many determination letters out there to prove it. As someone who has been getting into floor offsets, I can say it was a very helpful webcast. If you can't find it, I can share a copy of the pdf if you want. Link to comment Share on other sites More sharing options...
C. B. Zeller Posted May 7, 2018 Author Share Posted May 7, 2018 Yes, please, that would be great if you could share the PDF. 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, QKAPreferred Pension Planning Corp. corey@pppc.co Link to comment Share on other sites More sharing options...
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