Questions on Regulation Examples

[jlsfc]

I have a question on Regulation 1.401(a)(4)-9(b)(2)(v)(F) Example #2.
Whew, that's a keyboard full!

My question is how are the Equivalent Normal Allocation Rates and the Equivalent Normal Accrual Rates calculated?

Here is the example:
Employer B maintains Plan O, a defined benefit plan, and Plan P, a defined contribution plan. All of the six employees of Employer B are covered under both Plan O and Plan P. Under Plan O, all employees have a uniform normal accrual rate of 1% of compensation. Under Plan P, Employees A and B, who are HCEs, receive an allocation rate of 15% and participants C, D, E, and F, who are NHCEs, receive an allocation rate of 3%. Employer B aggregates Plans O and P for purposes of satisfying sections 410(b) and 401(a)(4). The table then gives the Equivalent Normal Allocation Rates and the Equivalent Normal Accrual Rates. I don't know how they get this table.

At age 55 for HCE A, the Equivalent Normal Allocation Rate is 3.93% and the Equivalent Normal Accrual Rate is 3.82%. You will have to look at the rest of the example to get the rest of the table but if you can just answer the Age 55 HCE calculation, I think I should be good.

[PosterNutBag]

It seems like you are assuming that you have are being given enough information to calculate these rates and you think you just don't know how to calculate them. That is not the case.

It appears to me that they are just providing these rates as "given information" in the example and do not give you the necessary information to verify their calculations.

For information on how Normal Accrual Rates are calculated, see 1.401(a)(4)-3(d)(1)(i).

For information on how Normal Allocation Rates are calculated, see 1.401(a)(4)-2(c)(2)(i).

[jlsfc]

I think I agree that the table in this example is given as an input. Let's move onto a different example where I don't think that the equivalent NAR's calculated are inputs.

1.401(a)(4)-8(b)(1)(viii) Example 4. Out in paragraph (vi) of the example, I am struggling with how they go from a 3% allocation rate to a 2.81 equivalent accrual rate for a 39 year old and froma 6% allocation rate to a lowest equivalent accrual rate of 3.74% for a 44 year old.

In addition, I don't think I have a problem with calculating Normal Accrual Rates or Normal Allocation Rates - it's the cross-testing arena of equivalent Normal Accrual Rates and equivalent Normal Allocation Rates. The only place I found the definition for calculating these is in 1.401(a)(4)-8(b)(2) but that didn't help me.

[PosterNutBag]

In 1.401(a)(4)-8(b)(1)(viii) Example 4, the 2.81% and 3.74% equivalent accrual rates that you mention are calculated based on hypothetical employees in order to test the steepness condition [1.401(a)(4)-8(b)(1)(iv)(D)(2)].

In Rick G's seminar, he touches on this steepness condition and mentions that it is VERY complex and can only be tested with hypothetical employees. He never really got into how to test with hypothetical employees. From what I remember, this is the kind of thing that is most likely not to appear on the exam due to its complexity and the fact that it is likely very time consuming. I think you are safe not knowing how to get those percentages based on these hypothetical employees b/c I doubt anyone else really know how to do this either.

I certainly have no clue how they got them, but I agree that the way the information is presented in this example that it appears that we should be able to calculate them ourselves using hypothetical employees.

I think the only thing you need to be concerned about in this example is to tell if the allocation rates are increasing "smoothly and at regular intervals." Outside of that, I don't see how testing anything else is practical.

Please let me know if anyone disagrees with my take on this one.

[jlsfc]

One of my coworkers has a number in his head of 8.8885, which is the age 65 annuity factor using GAM83 unisex at 8.5%. Using this, I am able to match the numbers:

Age 39 Employee:
65 - 39 = 26 years to age 65
Equivalent accrual rate = ((0.03) * (1.085)^26) / 8.8885 = 2.81%

Age 44 Employee:
65 - 44 = 21 years to age 65
Equivalent accrual rate = ((0.06 * (1.085)^21) / 8.8885 = 3.74%

Note the growth of 8.5% per year is interest only, as we don't use mortality prior to age 65.

I don't think the example gave us enough info (the GAM83 8.5% stuff) to calculate these numbers. It was the memory of a really nerdy co-worker who works on this all day that knew the answer in the end!