U.S. Nondiscrimination Accrual Rates
The nondiscrimination testing tools allow you to perform tests required for U.S. qualified pension plans by Sections 410(b) and 401(a)(4) of the Internal Revenue Code. First you run the U.S. Nondiscrimination Accrual Rates tool to prepare a ProVal database containing the active participant data (including normal and most valuable accrual rates) needed for the tests. After that, you run the U.S. Coverage and General Tests tool to perform the numeric tests. You may use the data prepared under the accrual rates tool or, alternatively, you may calculate the necessary information outside ProVal and import it into a ProVal database. Note that “active participants” means only those records whose status field code is mapped to the ProVal “Active” status; thus records whose status code field is mapped to the ProVal “Vested valued through active” status are not included in nondiscrimination tests.
Rates can be calculated for defined benefit plans and for cross-testing of defined benefit and defined contribution plans that are aggregated for nondiscrimination testing. ProVal provides test options for all three calculation methods: annual, accrued-to-date and projected. You may test on either a benefits or a contributions basis. Note that the accrual rates command saves unadjusted accrual rates (i.e., before adjustment for permitted disparity) and permitted disparity information to the ProVal database; the (coverage and general) tests command then uses this data to make the (optional) adjustment for permitted disparity.
Also, some tests that are required to demonstrate compliance with nondiscrimination rules are not numeric and therefore cannot be performed in ProVal. Thus passing the tests administered by ProVal’s nondiscrimination tests tools does not necessarily indicate a nondiscriminatory plan.
For official guidance, and to determine the appropriate ProVal parameter settings, refer to the applicable sections of the Internal Revenue Code (IRC) and other related Internal Revenue Service (IRS) promulgations (e.g., regulations, Revenue Procedures).
The parameters and topics of the U.S. Nondiscrimination Accrual Rates command are listed below. For more information about the parameters of the command to run the tests (after preparing the active participant data), see U.S. Coverage and General Tests.
The U.S. Nondiscrimination Accrual Rates dialog box contains, or provides access to, the parameters for calculating unadjusted accrual rates (i.e. before adjustment for permitted disparity) for defined benefit plans and for cross-testing of aggregated defined benefit (DB) and defined contribution (DC) plans. There are test options for all three calculation methods (annual, accrued-to-date and projected) and you may test on either a benefits or a contributions basis. In addition, parameters are provided for computing permitted disparity factors, which can then be used for the next step, the tests performed under the U.S. Coverage and General Tests .
Name is the description, by which it will be displayed in the U.S. Nondiscrimination Accrual Rates Library, of the library entry currently being defined.
Plan year ending date (plus one day) is the day the test is run “as of”. That is, attained age and accrued service will be calculated as of this date. Regulatory data (e.g., IRC § 401(a)(17) maximum compensation, wage bases for social security covered compensation and social security PIA, etc.) will be as of the beginning of the plan year. For example, if the plan year ending date is 12/31/2005, the regulatory data will be as of 1/1/2005. The plan year ending date (plus one day) also marks the end of the measurement period for the annual and accrued-to-date calculation methods. Note that once you specify the ending date of the plan year, ProVal displays the start and end points of the Measurement Period in the space (on the dialog box) below the parameter.
The Sample Lives button allows you to select, run and view sample life calculations of accrual rates and other nondiscrimination test data. For more information about running sample lives, and the panes and buttons of the Sample Life Output screen, see the discussion of sample lives under the Valuations command.
If you are not aggregating DB and DC plans for nondiscrimination testing, the Rate Basis selection should be Benefits. Otherwise, for cross-testing of DB and DC plans, choose Benefits to calculate accrual rates on a benefits basis, or Contributions to calculate accrual rates on a contributions basis. Under the Benefits basis, DC accruals, if any, will be converted to a benefit accrual (i.e., cross-tested) by dividing the DC accrual by an annuity factor deferred to the testing age. Cross-testing DC accruals on a benefits basis is not permitted under the projected method (see §1.401(a)(4)-8(b)(2)(i) of IRS regulations). Under the Contributions basis, DB accruals will be converted to a contribution (DC accrual, or allocation) by multiplying the DB accrual by an annuity factor deferred to the testing age. Only the annual method can be used when testing on a contributions basis (see §1.401(a)(4)-2(c)(2) and §1.401(a)(4)-8(c)(2) of IRS regulations).
The Calculation Method parameter provides three options. If you choose the Annual option, the measurement period is the current plan year. If you choose the Accrued-to-date option, the measurement period is the current plan year and all prior years. If you choose the Projected option, the measurement period is the current plan year and all prior and future years. Note that the projected method is not allowed for IRC § 410(b) coverage testing; thus it should be selected only for IRC § 401(a)(4) general tests.
Select a Plan Definition from the list of Plan Definitions saved in the current Project. The Plan Definition determines the Benefit Definitions used to calculate the normal and most valuable accrual rates. Also, the Plan Attributes topic of the Plan Definition will determine covered compensation rounding, final average salary methodology and annuity payment timing and frequency. However, regardless of how the Plan Attributes are specified, the average annual compensation calculation will always exclude current salary.
The Plan Definition’s termination Benefit Definition(s) will be used to calculate the normal accrual rates. The Plan Definition’s retirement Benefit Definition(s) will be used to calculate the most valuable accrual rates.
Select a topic to edit contains entries for each category of information (topic) found under the U.S. Nondiscrimination Accrual Rates command. Click the name of a topic to access its parameters:
DB Benefits – heading is for descriptive purposes only; click indented subtopic name