26. Target benefit plans - stated benefit, plans not providing for permitted disparity

Statement of Requirement: Code § 401(a)(4); Reg. § 1.401(a)(4)-8(b)(3); Rev. Proc. 2017-41R ev. Proc. 2023-37, 2023-51 I.R.B. 1491, sec. 6.03(9)1 0.02(2)(h)

(Note to reviewer: Because of the potential for discrimination, target benefit plans must satisfy the target benefit safe harbor contained in Reg. § 1.401(a)(4)-8(b)(3). In general, to be eligible for this safe harbor, a target benefit plan must:

• Provide that each participant's stated benefit be determined as the straight life annuity commencing at the participant's normal retirement age under a formula that would satisfy the requirements of § 1.401(a)(4)-3(b)(4)(i)(C)(1) or (2) (the design-based safe harbors for unit credit and fractional rule defined benefit plans), and each of the uniformity requirements of § 1.401(a)(4)-3(b)(2);

• Determine employer contributions necessary to fund a participant's stated benefit under the individual level premium funding method set forth below;

• Apply forfeitures under the plan to reduce future employer contributions (see LRM #39);

• Provide benefits solely from employer contributions and forfeitures; employee contributions (see LRMs #35-38); and any income, expenses, gains and losses allocated to a participant's account;

• Provide that the stated benefit at normal retirement age accrues ratably over the period ending with the plan year in which the participant is projected to reach normal retirement age and beginning with the latest of: (a) the first plan year in which the participant benefited under the plan, (b) the first plan

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year taken into account under the stated benefit formula, and (c) any plan year immediately following a plan year in which the plan did not satisfy the target benefit safe harbor in the regulations; and

• If permitted disparity is taken into account, contain a stated benefit formula that satisfies the requirements of § 1.401(l)-3.

A target benefit plan may limit increases in the stated benefit after normal retirement age consistent with Code § 411(b)(1)(H) (without regard to § 411(b)(1)(H)(iii)), provided that the limitation applies on the same terms to all participants in the plan. Thus, in the case of a target benefit plan with a stated benefit formula expressed as a specific unit of benefit per year of participation up to a maximum number of years of participation, only those participants who at normal retirement age have not earned the maximum number of years of participation under the benefit formula must continue to receive units of benefit for each year of participation earned after normal retirement age. If the number of years of participation a participant can earn under a unit credit target benefit plan is unlimited, the stated benefit of all participants working beyond normal retirement age must continue to increase on a uniform basis after normal retirement age.)

Sample Adoption Agreement Language:

Flat Benefit

Each participant's stated benefit is equal to _____ % of average annual compensation (reduced pro rata for the participant's years of projected participation less than 25) payable annually as a straight life annuity beginning at normal retirement age.

Unit Credit

Each participant's stated benefit is equal to _____ % of average annual compensation multiplied by the participant's years of projected participation, up to a maximum of _____ (no less than 25), payable annually as a straight life annuity beginning at normal retirement age. The first day of the first plan year taken into account under this stated benefit formula will be ____________.

(Note to reviewer: The stated benefit may be expressed only in the form of a straight life annuity without a term certain, refund feature, or survivor benefit.)

(Note to reviewer: The following language may be used in a target benefit plan that provides for a step in its current stated benefit formula, (e.g., a formula that provides a rate of benefit that changes after a certain specified number of years of participation).)

Each participant's stated benefit will be payable annually as a straight life annuity

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beginning at normal retirement age, in an amount equal to _____ percent of average annual compensation (R1) per year for the first _____ years of the participant's years of projected participation (y) and _____ percent (R2) of average annual compensation per year for the next _____ years of the participant's years of projected participation (such that the total years of projected participation taken into account under R1 and R2 is not less than 33).

If y is less than 33, R2 will be not less than:

(R1) (25 −y)

33 −y

(but in no case less than 0),

and not greater than:

(R1) (44 −y)

33 − y

Sample Plan Language:

For purposes of determining a participant's stated benefit, a participant's years of projected participation under the plan is the sum of (1) and (2), where (1) is the number of years during which the participant benefited under this plan beginning with the latest of: (a) the first plan year in which the participant benefited under the plan, (b) the first plan year taken into account in the stated benefit formula, and (c) any plan year immediately following a plan year in which the plan did not satisfy the safe harbor for target benefit plans in section 1.401(a)(4)-8(b)(3) of the Regulations, and ending with the last day of the current plan year, and (2) is the number of years, if any, subsequent to the current plan year through the end of the plan year in which the participant attains normal retirement age.

For purposes of this definition of years of projected participation, if this plan is a prior safe harbor plan, the plan is deemed to satisfy the safe harbor for target benefit plans in section 1.401(a)(4)-8(b)(3) of the Regulations and a participant is treated as benefiting under the plan in any plan year beginning prior to January 1, 1994.

A prior safe harbor plan is a plan that (1) was adopted and in effect on September 19, 1991, (2) which on that date contained a stated benefit formula that took into account service prior to that date, and (3) satisfied the applicable nondiscrimination requirements for target benefit plans for those prior years. For purposes of determining whether a plan satisfies the applicable nondiscrimination requirements for target benefit plans for plan years beginning before January 1, 1994, no amendments after September 19, 1991, other than amendments necessary to satisfy § 401(l) of the Code, will be taken into account.

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For purposes of this section, average annual compensation means the average of a participant's annual compensation, as defined in section _____ of the plan, over the threeconsecutive plan year period ending in the current year or in any prior year that produces the highest average. If the participant has less than three years of participation in this plan, compensation is averaged over the participant's total period of participation.

(Note to reviewer: The plan may provide for a consecutive year period longer than three years, or it may provide an election in the Adoption Agreement to enable the employer to select the consecutive year period (not less than three years) over which the participant's annual compensation will be averaged. However, the compensation averaging period may not take into account more than 10 years of service immediately preceding the date the average compensation is calculated.)

(Note to reviewer: For purposes of determining a participant's average annual compensation, all target benefit plans must use one of the definitions of Compensation provided in LRM #6.)

(Note to reviewer: In the sample plan provisions above, the participant's compensation history consists of the participant's entire period of service. However, a participant's compensation history may be limited to a period no shorter than the averaging period, provided it is continuous and ends in the current plan year. For example, a plan may provide that average annual compensation is determined based on the 5 years which produces the highest average out of the last 10 years. Also note that in determining a participant's compensation history, certain years may be disregarded. See Reg. § 1.401(a)(4)-3(e)(2)(ii)(B).)