Just came across a “standardized” adoption agreement, which allows the option of applying the accrual fraction before or after applying S415 to the projected. But it states that if the latter method (applying accrual fraction after applying S415 to projected) is selected then the plan will be discriminatory under section 401(a)(4)!!?

a) Is this true? If so, where does it say in the Code, Regs, IRS opinion letters…?

b) I thought, in a “standardized” adoption agreement, all options were de facto non-discriminatory (as long as they were not inconsistent with other selected options)?

Try 1.401(a)(4)-3(b)(4)(i)©(2). Does the document put any other restrictions on the selection of accrual after application of 415? Like maybe it can't be elected if there are NHCE's in the plan? Strange.

That section says: an employee is "permitted" to accrue the S415 Max over a period <25, provided the plan's flat benefit determinted without regard to S415 can accrued over no less that 25yrs.


So as I read it, the regs are "allowing" and are not "requiring" a faster accrual... That means, one can apply S415 before or after applying the fraction (provided, of course, the same approach is used consistently).

Is this not correct?

And no, there is no other restriction on selecting the option of applying S415 before multiplying by the accrual fraction.

Let's say you have a formula of 250% accrued over 25 years. Hence, somebody with 10 years to go will get 100%. If you limit the projected benefit to the 415% limit, the projected benefit, by definition, can never exceed 100% of pay. That would mean that your 10 year participant would still get 100%, but a 25 year participant would get, after 10 years, only 10/25 of 100%, rather than what is required, 10/25 of 250%. Limiting the projected benefit to the 415 limit serves to reduce accruals for those with greater than the shortest period necessary to generate the maximum accrual. That is 10 years in this case.

I know that - that is why one would want to limit the projected NRB to S415 before applying the fraction.

And I can't find where the regs prohibit this. This may be one of the many "permissible" discrimination situations, such as the situation where someone with over 25 yrs Svc would get lower accrual rate if the denominator in the fraction is not limited to 25.

If it is prohibited, then there is no great advange in using the Flat Benefit Vs Unit Credit since everyone with <=25yrs gets the same accrual % (in your example of 250%, everyone accrues 10% per year!).

Precisely.

Precisely What?

Do the Regs or Code explicitly prohibit applying S415 limit before the accrual fraction and if so, where? That's what I am trying to determine.

The beginning to that section reads: "The normal retirement benefit under the plan must be a flat benefit that requires a minimum of 25 years of service at normal retirement age for an employee to receive the unreduced flat benefit, DETERMINED WITHOUT REGARD TO SECTION 415. (emphasis added).

How can that language be interpreted as allowing a benefit to be first reduced by the 415 limit before applying the accrual fraction?

Actually, dittos to Mike ... precisely. No more needs to be said why limiting the PB to 415 before accrual would be discriminatory.