27. Target benefit formula -- stated

Statement of Requirement: Code §§ 401(l), 401(a)(4); Reg. §§ 1.401(a)(4)- 8(b)(3), 1.401(l)-3; Rev. Proc. 2023-37, 2023-51 I.R.B. 1491, sec. 10.02(2)(h)

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

Sample Plan Language:

[I. Excess Benefit Plan Formulas]

(1) Unit Credit formula – Base and excess benefit allocations will be made as elected in the adoption agreement.

(a) For this purpose, excess benefit allocations under a unit credit target benefit formula cannot exceed the participant’s cumulative permitted disparity limit or maximum excess allowance. The cumulative permitted disparity limit is equal to 35 minus: (1) the number of years the participant benefited or is treated as having benefited under this plan prior to the participant's first year of projected participation, and (2) the number of years credited to the participant for allocation or accrual purposes under one or more qualified plans or simplified employee pension plans (whether or not terminated) ever maintained by the employer other than years counted in (1) above or counted toward a participant's years of projected participation. For purposes of determining the participant's cumulative permitted disparity limit, all years ending in the same calendar year are treated as the same year.

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(b) The maximum excess allowance is equal to the lesser of: (1) the base benefit percentage or (2) the applicable factor determined from Tables I or II in section B below.

Overall permitted disparity limit: Notwithstanding paragraphs (a) and (b) above, for any plan year this plan benefits any participant who benefits under another qualified plan or simplified employee pension maintained by the employer that provides for permitted disparity (or imputes permitted disparity), the stated benefit for all participants under this plan will be equal to the excess benefit percentage (as elected in the Adoption Agreement) multiplied by the participant's total average annual compensation times the participant's years of projected participation under the plan up to the maximum years of projected participation taken into account in paragraphs (a) and (b).

(2) Flat benefit formula – Allocations will be made equal to the base and excess benefit percentages as elected in the adoption agreement.

(a) For this purpose, the maximum excess allowance is equal to the lesser of: (1) the base benefit percentage; or (2) 35 times the applicable factor determined from Tables I or II in section B below.

(b) For a participant with less than 35 years of projected participation, the base benefit percentage and the excess benefit percentage will be reduced by being multiplied by a fraction, the numerator of which is the participant's years of projected participation, and the denominator of which is 35.

(c) Cumulative permitted disparity reduction: If the number of the participant's cumulative permitted disparity years exceeds 35, the excess benefit percentage will be further reduced as provided below. A participant's cumulative permitted disparity years consists of the sum of: (1) the participant's years of projected participation (up to 35), (2) the number of years the participant benefited or is treated as having benefited under this plan prior to the participant's first year of projected participation, and (3) the number of years credited to the participant for allocation or accrual purposes under one or more qualified plans or simplified employee pension plans (whether or not terminated) ever maintained by the employer (other than years counted in (1) or (2) above). For purposes of determining the participant's cumulative permitted disparity limit, all years ending in the same calendar year are treated as the same year.

If the cumulative permitted disparity reduction is applicable, the excess benefit percentage will be reduced as follows:

(A) Subtract the participant's base benefit percentage from the participant's excess benefit percentage, (after modification in accordance with the paragraph preceding this cumulative permitted disparity reduction).

(B) Multiply the result determined in (A) by a fraction (not less than 0), the numerator of which is 35 minus the sum of the years in (2) and (3) above, and the

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denominator of which is 35.

(C) The participant's excess benefit percentage is equal to the sum of the result in (B) and the participant's base benefit percentage, as otherwise modified.

(d) Overall permitted disparity limit: Notwithstanding the above, for any plan year this plan benefits any participant who benefits under another qualified plan or simplified employee pension plan maintained by the employer that provides for permitted disparity (or imputes permitted disparity), the stated benefit for all participants under this plan will be equal to the excess benefit percentage entered into the benefit formula as elected in the Adoption Agreement multiplied by the participant's total average annual compensation under the plan (prorated for years of projected participation less than 35).

[II. Offset Plan Formulas]

(1) Unit Credit formula – Base and excess benefit allocations will be made as elected in the adoption agreement.

(a). Base and excess percentages elected will be limited to the maximum number of years of projected participation taken into account as also elected in the adoption agreement.

(b) The gross benefit percentage will be limited to the maximum number of years of projected participation taken into account as also elected in the adoption agreement.

(c) The maximum offset allowance will not exceed the lesser of: (1) the applicable factor from Tables I or II in section B below, and (2) one-half of the gross benefit percentage, multiplied by a fraction (not to exceed one), the numerator of which is the participant's average annual compensation, and the denominator of which is the participant's final average compensation up to the offset level.

(d) Overall permitted disparity limit: Notwithstanding the preceding paragraphs (a) and (b), for any plan year this plan benefits any participant who benefits under another qualified plan or simplified employee pension plan maintained by the employer that provides for permitted disparity (or imputes permitted disparity), the stated benefit for all participants under this plan will be equal to the gross benefit percentage as elected in the Adoption Agreement (without regard to the offset) times the participant's total average annual compensation times the participant's years of projected participation under the plan up to the maximum of years of projected participation taken into account in paragraphs (a) and (b).

(2) Flat benefit formula – Allocations will be made equal to the base and excess benefit percentages will be made as elected in the adoption agreement.

The maximum offset allowance will not exceed the lesser of: (1) the applicable factor from Tables I or II below, multiplied by 35, and (2) one-half of the gross benefit

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percentage, multiplied by a fraction (not to exceed one), the numerator of which is the participant's average annual compensation, and the denominator of which is the participant's final average compensation up to the offset level.

For a participant with less than 35 years of projected participation, both the gross benefit percentage and the offset percentage will be reduced by being multiplied by a fraction, the numerator of which is the number of the participant's years of projected participation, and the denominator of which is 35.

Cumulative permitted disparity reduction: If the number of the participant's cumulative permitted disparity years exceeds 35, the gross benefit percentage and the offset will be further reduced as provided below. A participant's cumulative permitted disparity years consists of the sum of: (1) the participant's years of projected participation (up to 35), (2) the number of years the participant benefited or is treated as having benefited under this plan prior to the participant's first year of projected participation, and (3) the number of years credited to the participant for allocation or accrual purposes under one or more qualified plans or simplified employee pension plans (whether or not terminated) ever maintained by the employer (other than years counted in (1) or (2) above). For purposes of determining the participant's cumulative permitted disparity limit, all years ending in the same calendar year are treated as the same year. If the cumulative permitted disparity reduction is applicable, the gross benefit percentage and the offset will be reduced as follows:

(A) The offset will be reduced by multiplying it by a fraction (not less than 0), the numerator of which is 35 minus the sum of the years in (2) and (3) above, and the denominator of which is 35.

(B) The gross benefit percentage will be reduced by the number of percentage points by which the offset was reduced in (A) above.

Overall permitted disparity limit: Notwithstanding the above, for any plan year this plan benefits any participant who benefits under another qualified plan or simplified employee pension plan maintained by the employer that provides for permitted disparity (or imputes permitted disparity), the stated benefit for all participants under this plan will be equal to the gross benefit percentage entered in the benefit formula as elected in the Adoption Agreement (without regard to the offset) multiplied by the participant's total average annual compensation under the plan (prorated for years of projected participation less than 35).

B. The applicable factor is the factor derived from the applicable table(s) below based on the normal retirement age under the plan. If the employer elects as an integration level (or offset level) under options 4 or 5 or in the Adoption Agreement, Table II will apply. Otherwise, Table I will apply.

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(Note to reviewer: Reg. § 1.401(l)-3(e) requires an adjustment to the 0.75 factor in the maximum excess or offset allowance with respect to benefits payable prior to a participant's social security retirement age using factors set forth in the regulations. The tables below incorporate these factors so that the appropriate reduction is reflected in the plan's stated benefit formula. To satisfy the requirements of § 1.401(a)(4)-8(b)(3) for target benefit plans that take into account permitted disparity, the 0.75- percent factor, as otherwise reduced, must be multiplied by a factor of 0.80. Table I below contains the reduction factors from Table IV of Reg. § 1.401(l)-3(e)(3) with respect to benefits commencing before a participant's normal retirement age, multiplied by a factor of 0.80. The use of certain integration (or offset) levels requires an additional reduction to the .75 factor (see, e.g., options 4 and 5 in section C. below). Table II below contains factors that are the product of the factors from Table I below and 0.80. Table II is to be used if the employer selects option 4 or 5 in section C of the Adoption Agreement as an integration level (or offset level).)

III. Normal Retirement Age Tables:

Age TABLE I TABLE II

65 0.5200 0.4160

64 0.4856 0.3884

63 0.4504 0.3603

62 0.4160 0.3328

61 0.3816 0.3052

60 0.3464 0.2771

59 0.3296 0.2636

58 0.3120 0.2496

57 0.2944 0.2355

56 0.2776 0.2220

55 0.2600 0.2080

IV. Definitions

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 Regulations § 1.401(a)(4)-8(b)(3),

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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.

Average annual compensation. Average annual compensation is the average of a participant’s annual compensation as defined in section _____ of the plan, over the threeconsecutive plan year period ending in either the current year or 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 blank should be filled in with the plan section number that corresponds to LRM #6.)

(Note to reviewer: The plan may provide for a consecutive year period longer than three years or 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: 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, as long as 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).)

Covered compensation. A participant's covered compensation for a plan year is the average (without indexing) of the taxable wage bases in effect for each calendar year during the 35-year period ending with the last day of the calendar year in which the participant attains (or will attain) social security retirement age.

In determining a participant's covered compensation for a plan year, the taxable wage base in effect for the current plan year and any subsequent plan year will be assumed to be the same as the taxable wage base in effect as of the beginning of the plan year for which the determination is being made. Covered compensation will be determined based on the year designated by the employer in section _____ of the adoption agreement.

(Note to reviewer: The blank above should be filled in with the section of the Adoption Agreement that corresponds with the Sample Adoption Agreement.)

A participant's covered compensation for a plan year before the 35-year period ending with the last day of the calendar year in which the participant attains social security

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retirement age is the taxable wage base in effect as of the beginning of the plan year. A participant's covered compensation for a plan year after such 35-year period is the participant's covered compensation for the plan year during which the 35-year period ends.

(Note to reviewer: A plan may also define covered compensation for plan years beginning prior to 1995 as the average (without indexing) of the taxable wage bases for the 35 calendar years ending with the year prior to the calendar year an individual attains social security retirement age.)

Taxable wage base. Taxable wage base is the contribution and benefit base in effect under section 230 of the Social Security Act at the beginning of the plan year.
Final average compensation. [OFFSET PLANS ONLY] A participant's final average compensation is the average of the participant's annual compensation, as defined in section _____ of the plan, from the employer for the three-consecutive year period ending with or within the plan year. If a participant's entire period of employment with the employer is less than three consecutive years, compensation is averaged on an annual basis over the participant's entire period of employment. Compensation for any year in excess of the taxable wage base in effect at the beginning of such year will not be taken into account.

(Note to reviewer: The blank should be filled in with the plan section number that corresponds to LRM #6.)

Sample Adoption Agreement Language

A. Each participant's stated benefit under the plan is a straight life annuity commencing at normal retirement age in an amount:

[Excess Benefit Plans]

(1) ( ) Unit Credit

Equal to the sum of (a) and (b) below:

(a) _____ % (base benefit percentage) times average annual compensation up to the integration level for the plan year times the participant's years of projected participation plus a benefit equal to _____ % (excess benefit percentage, not to exceed the base benefit percentage by more than the maximum excess allowance) times average annual compensation in excess of the integration level for the plan year times the participant's years of projected participation. The maximum number of years of projected participation taken into account under this paragraph will be _____ (may not be less than 25 and may not exceed 35). However, the number of years of projected participation taken into account in the preceding sentence for any participant may not exceed the

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participant's cumulative permitted disparity limit.

(b) _____ % (not to exceed the excess benefit percentage) times average annual compensation for each year of projected participation after the period taken into account under paragraph (a). (If the number of years of projected participation taken into account under paragraph (a) is less than 35 (as modified by the participant's cumulative permitted disparity limit), then for each year of projected participation after the period taken into account under paragraph (a) up to and including the 35th year of participation (as modified by the participant's cumulative permitted disparity limit), this percentage will be equal to the excess benefit percentage.) The maximum number of years of projected participation taken into account under this paragraph will be _____.

(2) ( ) Flat Benefit

Equal to _____ % times average annual compensation up to the integration level for the plan year (base benefit percentage) plus a benefit equal to _____ % (excess benefit percentage) (not to exceed the base benefit percentage by more than the maximum excess allowance) times average annual compensation in excess of the integration level for the plan year.

[Offset Plans]

(1) ( ) Unit Credit

Equal to the sum of (a) and (b) below:

(a) _____ % (gross benefit percentage) times average annual compensation for the plan year times the participant's years of projected participation offset by _____ % (not to exceed the maximum offset allowance) times final average compensation up to the offset level times the participant's total years of projected participation. The maximum number of years of projected participation taken into account under this paragraph will be _____ (may not be less than 25 and may not exceed 35). However, the number of years of projected participation taken into account in the preceding sentence for any participant may not exceed the participant's cumulative permitted disparity limit. The participant's cumulative permitted disparity limit is equal to 35 minus: (1) the number of years the participant benefited or is treated as having benefited under this plan prior to the participant's first year of projected participation, and (2) the number of years credited to the participant for allocation or accrual purposes under one or more qualified plans or simplified employee pension plans (whether or not terminated) ever maintained by the employer other than years counted in (1) above or counted toward a participant's years of projected participation. For purposes of determining the participant's cumulative permitted disparity limit, all years ending in the same calendar year are treated as the same year.

(b) _____ % (not to exceed the gross benefit percentage) times average annual

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compensation for each year of projected participation after the period set forth in paragraph (a). (If the number of years of projected participation set forth in paragraph (a) is less than 35 (as modified by the participant's cumulative permitted disparity limit), then for each year of projected participation after the period set forth under paragraph (a) up to and including the 35th year of projected participation (as modified by the participant's cumulative permitted disparity limit), this percentage will be equal to the gross benefit percentage.) The maximum number of years of projected participation taken into account under this paragraph will be._____.

(2) ( ) Flat Benefit

Equal to _____ % times average annual compensation offset by _____ % (not to exceed the maximum offset allowance) times final average compensation up to the offset level.

B. The integration level (or offset level) for each plan year for each participant will be an amount equal to:

(1) ( ) such participant’s covered compensation for the plan year.

(2) ( ) the greater of $10,000 or one-half of the covered compensation of any individual who attains social security retirement age during the calendar year in which the plan year begins.

(3) ( ) $_____ (a single dollar amount not to exceed the greater of $10,000 or onehalf of covered compensation of any individual who attains social security retirement age during the calendar year in which the plan year begins).

(4) ( ) $ _____ (a single dollar amount that exceeds the greater of $10,000 or onehalf of covered compensation of any individual who attains social security retirement age during the calendar year in which the plan year begins, but not to exceed the greater of $25,450 or 150% of the covered compensation of an individual attaining social security retirement age in the current plan year).

(5) ( ) a uniform percentage equal to _____ % (greater than 100 percent but not greater than 150 percent) of each participant’s covered compensation for the current year, and in no event in excess of the taxable wage base).

(Note to reviewer: If option 4 or 5 is selected, the applicable factor must be derived from Table II above.)

(Note to reviewer: A Pre-approved Plan may contain integration levels (or offset levels) not specified above that require greater reductions in the 0.75-percent factor. A plan that allows the employer to elect such integration levels must ensure that the maximum excess or offset allowance is appropriately limited. Pre-approved Plans may not allow the employer to elect the intermediate amount integration level

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(or offset level) under Reg. § 1.401(l)-3(d)(5).)

Sample Plan Language:

(Note to reviewer: The plan may provide, or an election may be provided in the Adoption Agreement, that in determining a participant’s final average compensation, the plan year in which a participant terminates employment may be disregarded if such year is disregarded in determining final average compensation for all participants.)

Covered compensation will be determined based on the following year:

[ ] current year.

[ ] _____ year (may be the covered compensation for a plan year earlier than the current plan year, provided the earlier plan year is the same for all participants and is not earlier than the plan year that begins 5 years before the current plan year. If the plan year entered is more than five years prior to the current plan year, the participant’s covered compensation will be that determined under the covered compensation table for the plan years five years prior to the current plan year).