28. Target benefit plans – calculation of employer contributions

Statement of Requirement: Code § 401(a)(4); Reg. §§ 1.401(a)(4)-8(b)(3), 1.401(a)(4)-13(e); Rev. Proc. 2017-41R ev. Proc. 2023-37, 2023-51 I.R.B. 1491, sec. 5.16(1)9 .03(4)

Sample Plan Language:

For each plan year the employer will contribute for each participant who either completes more than 500 hours of service during the plan year or is employed on the last day of the plan year the annual employer contribution calculated below. The annual employer contribution necessary to fund the stated benefit with respect to a participant will be determined each year as follows:

(Note to reviewer: A Nonstandardized plan may, as an option, require a participant (a) to be employed on the last day of the plan year, and / or (b) to have completed up to 1,000 hours of service during the plan year to receive an employer contribution.)

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(Note to reviewer: A plan that utilizes elapsed time in lieu of counting hours of service may substitute the completion of either 91 consecutive calendar days or 3 consecutive calendar months for 500 hours of service in the above sample language.)

Step 1: If the participant has not yet reached normal retirement age, calculate the present value of the stated benefit by multiplying the stated benefit by the factor that is the product of: i) the applicable factor in Table I (if attained (current) age is less than 65) or Table IA (if attained age is greater than or equal to 65), and (ii) the applicable factor in Table III. If the participant is at or beyond normal retirement age, calculate the present value of the stated benefit by multiplying the stated benefit by the factor in Table IV corresponding to that normal retirement age.

(Note to reviewer: If the plan provides options for normal retirement ages other than those for which factors are provided in Tables III below, the plan must contain the appropriate factors.)

Step 2: Calculate the excess, if any, of the amount determined in Step 1 over the theoretical reserve.

Step 3: Amortize the result in Step 2 by multiplying it by the applicable factor from Table II. For the plan year in which the participant attains normal retirement age and for any subsequent plan year, the applicable factor is 1.0. For purposes of this section, the theoretical reserve is determined according to (i) and (ii) below:

(i) Initial theoretical reserve. A participant's theoretical reserve as of the last day of the participant's first year of projected participation (year 1) is zero. However, if this plan is a prior safe harbor plan with a stated benefit formula that takes into account plan years prior to the first plan year this plan satisfies the safe harbor in Regulation section 1.401(a)(4)-8(b)(3)(c), the initial theoretical reserve is determined as follows:

(A) Calculate as of the last day of the plan year immediately preceding year 1 the present value of the stated benefit, using the actuarial assumptions, the provisions of the plan, and the participant's compensation as of such date. For a participant who is beyond normal retirement age during year 1, the stated benefit will be determined using the actuarial assumptions, the provisions of the plan, and the participant's compensation as of such date, except that the straight life annuity factor used in that determination will be the factor applicable for the participant's normal retirement age.

(B) Calculate as of the last day of the plan year immediately preceding year 1 the present value of future employer contributions, i.e., the contributions due each plan year using the actuarial assumptions, the provisions of the plan, (disregarding those provisions of the plan providing for the limitations of section 415 of the Code or the

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minimum contributions under section 416), and the participant's compensation as of such date, beginning with year 1 through the end of the plan year in which the participant attains normal retirement age.

(C) Subtract the amount determined in (B) from the amount determined in (A).

(ii) Accumulate the initial theoretical reserve determined in (i) and the employer contribution (as limited by section 415 of the Code, but without regard to any required minimum contributions under section 416) for each plan year beginning in year 1 up through the last day of the current plan year (excluding contribution(s) (if any) for the current plan year) using the plan's interest assumption in effect for each such year. In any plan year following the plan year in which the participant attains normal retirement age, the accumulation is calculated assuming an interest rate of 0%.

For purposes of determining the level of annual employer contribution necessary to fund the stated benefit, the calculations in (i) and (ii) above will be made as of the last day of each plan year, on the basis of the participant's age on the participant's last birthday, using the interest rate in effect on the last day of the prior plan year.

Sample Adoption Agreement Language:

For purposes of determining the annual employer contribution necessary to fund the stated benefit, the interest rate will be:

( ) 7.50%

( ) 8.00%

( ) 8.50%

TABLE I: Present value factors (See * below)

number of years from attained age

to age 65* interest rate

--- 7.50% 8.00% 8.50%

1 7.868 7.589 7.326 2 7.319 7.027 6.752 3 6.808 6.506 6.223 4 6.333 6.024 5.736 5 5.891 5.578 5.286 6 5.480 5.165 4.872 7 5.098 4.782 4.491

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8 4.742 4.428 4.139 9 4.412 4.100 3.815 10 4.104 3.796 3.516 11 3.817 3.515 3.240 12 3.551 3.255 2.986 13 3.303 3.014 2.752 14 3.073 2.790 2.537 15 2.859 2.584 2.338 16 2.659 2.392 2.155 17 2.474 2.215 1.986 18 2.301 2.051 1.831 19 2.140 1.899 1.687 20 1.991 1.758 1.555 21 1.852 1.628 1.433 22 1.723 1.508 1.321 23 1.603 1.396 1.217 24 1.491 1.293 1.122 25 1.387 1.197 1.034 26 1.290 1.108 0.953 27 1.200 1.026 0.878 28 1.116 0.950 0.810 29 1.039 0.880 0.746 30 0.966 0.814 0.688 31 0.899 0.754 0.634 32 0.836 0.698 0.584 33 0.778 0.647 0.538 34 0.723 0.599 0.496 35 0.673 0.554 0.457 36 0.626 0.513 0.422 37 0.582 0.475 0.389 38 0.542 0.440 0.358 39 0.504 0.407 0.330 40 0.469 0.377 0.304 41 0.436 0.349 0.280 42 0.406 0.323 0.258 43 0.377 0.299 0.238 44 0.351 0.277 0.219 45 0.327 0.257 0.202

• If a participant's attained age is at or above 65 but still below the participant's NRA, use Table IA.

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Note: These factors are based on the UP-1984 Mortality Table.

TABLE IA: Present value factors for participants below normal retirement age (to be used only when attained age is greater than or equal to 65.)

number of years

from age 65 to

attained age interest rate

--- 7.50% 8.00% 8.50%

0 8.458 8.196 7.949 1 9.092 8.852 8.625 2 9.774 9.560 9.358 3 10.507 10.325 10.153 4 11.295 11.151 11.016 5 12.143 12.043 11.953 6 13.053 13.006 12.969 7 14.032 14.047 14.071 8 15.085 15.170 15.267 9 16.216 16.384 16.565 10 17.432 17.695 17.973 11 18.740 19.110 19.500 12 20.145 20.639 21.158 13 21.656 22.290 22.956 14 23.280 24.073 24.907 15 25.026 25.999 27.025

Note: These factors are based on the UP-1984 Mortality Table.

TABLE II: Amortization factors

number of years from attained age to normal

retirement age interest rate

--- 7.50% 8.00% 8.50%

1 0.5181 0.5192 0.5204 2 0.3577 0.3593 0.3609 3 0.2777 0.2796 0.2814 4 0.2299 0.2319 0.2339 5 0.1982 0.2003 0.2024

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6 0.1756 0.1778 0.1801 7 0.1588 0.1611 0.1634 8 0.1458 0.1482 0.1506 9 0.1355 0.1380 0.1405 10 0.1272 0.1297 0.1323 11 0.1203 0.1229 0.1255 12 0.1145 0.1171 0.1198 13 0.1096 0.1123 0.1151 14 0.1054 0.1082 0.1110 15 0.1018 0.1046 0.1075 16 0.0986 0.1015 0.1044 17 0.0958 0.0988 0.1018 18 0.0934 0.0964 0.0994 19 0.0912 0.0943 0.0974 20 0.0893 0.0924 0.0956 21 0.0876 0.0908 0.0940 22 0.0861 0.0893 0.0925 23 0.0847 0.0879 0.0912 24 0.0835 0.0867 0.0901 25 0.0823 0.0857 0.0890 26 0.0813 0.0847 0.0881 27 0.0804 0.0838 0.0872 28 0.0795 0.0830 0.0865 29 0.0788 0.0822 0.0858 30 0.0781 0.0816 0.0851 31 0.0774 0.0810 0.0846 32 0.0768 0.0804 0.0840 33 0.0763 0.0799 0.0836 34 0.0758 0.0794 0.0831 35 0.0753 0.0790 0.0827 36 0.0749 0.0786 0.0824 37 0.0745 0.0783 0.0820 38 0.0742 0.0779 0.0817 39 0.0739 0.0776 0.0815 40 0.0736 0.0774 0.0812 41 0.0733 0.0771 0.0810 42 0.0730 0.0769 0.0808 43 0.0728 0.0767 0.0806 44 0.0726 0.0765 0.0804 45 0.0724 0.0763 0.0802

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TABLE III: Factors to be multiplied by those in Table I.

normal retirement age interest rate

--- 7.50% 8.00% 8.50%

80 0.206 0.194 0.184 79 0.231 0.219 0.207 78 0.258 0.246 0.234 77 0.289 0.276 0.263 76 0.322 0.309 0.296 75 0.359 0.346 0.333 74 0.400 0.387 0.374 73 0.446 0.432 0.419 72 0.495 0.482 0.469 71 0.549 0.537 0.525 70 0.609 0.597 0.586 69 0.674 0.664 0.653 68 0.745 0.736 0.728 67 0.822 0.816 0.810 66 0.907 0.904 0.900 65 1.000 1.000 1.000 64 1.101 1.106 1.110 63 1.212 1.221 1.231 62 1.332 1.348 1.363 61 1.464 1.486 1.509 60 1.606 1.637 1.669 59 1.761 1.802 1.844 58 1.929 1.982 2.036 57 2.111 2.177 2.246 56 2.309 2.390 2.475 55 2.523 2.622 2.726

NOTE: These factors are based on the UP-1984 Mortality Table.

TABLE IV: Factors for participants who are at or beyond normal retirement age.

normal retirement age interest rate

--- 7.50% 8.00% 8.50%

80 5.151 5.053 4.959 79 5.370 5.264 5.162 78 5.591 5.476 5.366

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77 5.814 5.690 5.572 76 6.039 5.905 5.777 75 6.266 6.122 5.985 74 6.494 6.339 6.192 73 6.721 6.556 6.398 72 6.947 6.771 6.603 71 7.171 6.983 6.804 70 7.392 7.192 7.003 69 7.610 7.399 7.198 68 7.825 7.601 7.389 67 8.037 7.801 7.577 66 8.248 7.999 7.764 65 8.458 8.196 7.949 64 8.666 8.390 8.131 63 8.870 8.581 8.311 62 9.072 8.770 8.485 61 9.270 8.954 8.657 60 9.463 9.133 8.825 59 9.651 9.307 8.986 58 9.834 9.477 9.143 57 10.012 9.641 9.295 56 10.186 9.801 9.442 55 10.354 9.955 9.585

NOTE: These factors are based on the UP-1984 Mortality Table.