- 3 -
|
Page 3 For applications submitted to conform to the 2020 RA List
2) The stated benefit may not credit service for years before the employee first benefited under the plan nor service in years in which
the target benefit safe harbor was not satisfied. However, these rules generally do not apply to a plan that was adopted and in
effect on September 19, 1991, and that was qualified under prior law.
3) Employer contributions are based on the employee’s stated benefit using the funding method set forth in the regulations and
discussed below.
4) Forfeitures reduce employer contributions.
5) Employee contributions are not used to fund the stated benefit.
6) Disparity must satisfy the permitted disparity rules that apply to defined benefit plans (see Worksheet 5B for special rules).
The requirements of section 411(b)(1)(H) that prohibit a defined benefit plan from ceasing or reducing accruals on account of the participant’s
attainment of any age generally also apply to a target benefit plan. (See Alert Guidelines 2A for a discussion of these rules). Thus, the
uniform post-normal retirement benefits rule discussed in line XI.a. of Worksheet 5A may apply. Such benefits must be provided under
the stated benefit formula, subject to any uniformly applicable service cap under the formula. Actuarial increases in the stated benefit for
delayed retirement are impermissible.
The regulations contain a detailed formula for calculating the required employer contribution that must be followed by a target benefit safe
harbor plan. Specialists should refer to the regulations when reviewing a target benefit plan for the actual step-by-step calculations, but the
main steps and some important points to keep in mind are described below.
First, a theoretical reserve is calculated based on the stated benefit as of the date the employer’s required contribution for the current plan
year is determined. The initial reserve for the participant’s first year of participation (or the first plan year taken into account under the stated
benefit formula, if that is the current year) is zero.
(The theoretical reserve for the first plan year following any plan year in which the plan failed to satisfy this safe harbor is also zero.
However, if the plan was adopted and in effect on September 19, 1991 and met the qualification requirements for target benefit plans under
prior law, it may be allowed to take into account years of service for years in which this safe harbor was not met. In this case, the theoretical
reserve as of the determination date for the last year before the plan satisfies this safe harbor is the excess, if any, of the actuarial present
value of the stated benefit the employee is projected to have at NRA over the actuarial present value of future employee contributions
required through NRA.)
The subsequent years’ reserves are the sum of the theoretical reserve for the prior year plus the required contribution for the prior year,
increased, using a standard interest rate, for interest between the prior year determination date and the current year determination date.
Next, the actuarial present value of the participant’s fractional rule benefit under the stated formula is determined as of the current plan
year’s determination date, using a standard interest rate and mortality table set forth in the plan and uniformly applied.
The required contribution for the current year is determined by amortizing the difference between the theoretical reserve and the fractional
rule benefit on a level basis from the determination date for the current year and the determination date for the year in which the participant
is projected to reach NRA.
Where the participant is at or past NRA, the required contribution is the difference between the actuarial present value of the stated benefit
for the current year, using a straight life annuity factor based on the employee’s NRA (rather than attained age), and the theoretical reserve
as of the determination date.
Required contributions must be limited or increased, if necessary, to comply with sections 415 and 416, respectively. For purposes of these
calculations, interest rates between 7.5% and 8.5% are standard interest rates. The UP-84 mortality table is an example of a standard
mortality table.
1.401(a)(4)-8(b)(3)
III. Nondiscriminatory Compensation
Line a. If a design-based safe harbor plan bases allocations on compensation, it must use a definition of compensation that is nondiscriminatory
under section 1.414(s)-1 of the regulations. (The requirement to use a nondiscriminatory definition of compensation would also apply in
the case of the definition of compensation that a section 401(k) or 401(m) plan must use in its actual deferral percentage (ADP) or actual
contribution percentage (ACP) test.) The regulations contain certain definitions that are automatically nondiscriminatory under section 414(s).
A plan may use an alternative definition, provided the definition is reasonable, not designed to favor highly compensated employees, and
that the average percentage of total compensation included for highly compensated employees as a group does not exceed the average
percentage for nonhighly compensated employees by more than a de minimis amount. In addition, under certain circumstances a plan
may use rate of compensation, imputed compensation, or prior-employer compensation under a definition of compensation that satisfies
section 414(s). Section 414(s) and the accompanying regulations provide specific definitions of compensation that satisfy section 414(s).
One of the definitions is compensation within the meaning of section 415(c)(3). See Explanation #6 for the full definition of compensation
for section 415 purposes, (including other changes that are not reflected in the following summary).
|