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  #1  
Old 01-02-2016, 10:43 PM
Hello World Hello World is offline
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Default EOM 3 Task 5

I see some older posts about the 75% rule so I just wanted to clarify something. Here is the rule,

"Contribution rates may vary between employees under a DC pension plan. A plan‟s minimum contribution rate must be no less than 75% of the maximum contribution rate used in the pension plan. For example, if the maximum contribution rate for an employee is set to 12% of pensionable earnings, then the contribution rate for any other member must be at least 9% of pensionable earnings."

The way I read it is, that all contributions based on Pensionable earnings must be within 75% of each other. However, we do not care about the Member Contribution (column J) In other words if someone earns 400K his max contribution (due to the law of the land) is 30K. That is only 7.5% of his salary. However, it is 15% of his pensionable earnings. Now take the guy who earns 65K his contribution according to relative to his salary is 15% and relative to his pensionable earnings is 15% as well. So despite the fact that personally the 65k earner is contributing double the percentage of his income (The 400k earner is contributing 7.5% while the 65k 15%) we don't care. The 75% rule only pertains to the Pensionable earnings factor. So if the 65k only contribute say 11% of his pensionable earnings while the 400k contributes 15% then we have a problem.
In a nutshell our key concern is pensionable earnings Is that correct?
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Old 01-03-2016, 01:15 AM
bigb bigb is offline
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I think your reading too much into it. If the ER's max contribution to any given EE is X%, then the ER must, at minimum, contribute (0.75*X)% to every other eligible EE - this is irrespective of EE contributions (assuming they are eligible/participating).

Last edited by bigb; 01-03-2016 at 01:35 AM..
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  #3  
Old 01-03-2016, 02:15 PM
Hello World Hello World is offline
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.75*x% of what? What is it a percent of? I believe its 75% of pensionable earnings not ones own personal earnings. I bring this up because I see some struggled with it. So all I am saying is that's its ok for one to contribute only 7.5% of his personal earnings while another employee is contributing 15% of his personal earnings providing that both percentages are within 75% of each other in terms of pensionable earnings.

Please correct me if I am wrong
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  #4  
Old 01-03-2016, 03:48 PM
bigb bigb is offline
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Employer ABC offers a defined contribution retirement plan in the form of a 401(k). Employer ABC has a favorite employee Q who earns $250K year. Employer ABC decides they want to contribute an amount equal to 10% of employee Q's salary to his defined contribution fund. Since employer ABC funded employee Q at 10%, they cannot discriminate against other employees in the firm by offering an abnormally low contribution rate with respect to what they gave employee Q, in this case the floor would be 0.75*10% = 7.5%. Therefore, at minimum, this would require a 7.5% contribution (by the employer) to all other eligible employees in the firm.

(Note this condition is irrespective of the employee contributions, assuming they are participating in the program.)

(This rule goes back to the many non-discrimination tests that pensions and other employee benefit plans are subject to, meant to limit the amount of favor shown to the highly compensated executives/employees.)

Last edited by bigb; 01-03-2016 at 03:52 PM..
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Old 01-03-2016, 05:20 PM
Hello World Hello World is offline
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Yeah but I think the logic should be more like this.

Employee #1 earns 400k a yr. That means his pensionable earnings is at most 200k. Thus if we contribute 30K that's 15% of pensionable earnings and 7.5% of salary.

Employee# 2 earns say $65,000 a year. He contributes 15% of his pensionable earnings (since thats 65k) and also 15% of his salary.

Now despite the fact the employee #2 is contributing double the percent of his salary verse employee #1's contribution based on his salary (7.5% verse 15%) we don't care. Because both are contributing 15% of his "pensionable earnings".
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  #6  
Old 01-03-2016, 05:42 PM
bigb bigb is offline
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Quote:
Originally Posted by Hello World View Post
Yeah but I think the logic should be more like this.

Employee #1 earns 400k a yr. That means his pensionable earnings is at most 200k. Thus if we contribute 30K that's 15% of pensionable earnings and 7.5% of salary.

Employee# 2 earns say $65,000 a year. He contributes 15% of his pensionable earnings (since thats 65k) and also 15% of his salary.

Now despite the fact the employee #2 is contributing double the percent of his salary verse employee #1's contribution based on his salary (7.5% verse 15%) we don't care. Because both are contributing 15% of his "pensionable earnings".
"Contribution rates may vary between employees under a DC pension plan. A plan's minimum contribution rate must be no less than 75% of the maximum contribution rate used in the pension plan. For example, if the maximum contribution rate for an employee is set to 12% of pensionable earnings, then the contribution rate for any other member must be at least 9% of pensionable earnings."

Your not concerned with contributions made by the employee at this point, and how they may potentially vary from employee to employee. This is with respect to the Plan's (Employers) contributions, but do as you see best.

Last edited by bigb; 01-03-2016 at 05:49 PM..
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  #7  
Old 01-03-2016, 07:30 PM
Hello World Hello World is offline
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Bigb,
Yes correct its in respect to the employers contribution not the employee. But what must be within 75% of each other? The employers contribution in relation to ones pensionable earnings not the employers contribution in relation to an employee's salary.

I just don't see where you see my logic as flawed. All I am trying to say is that we don't care if an employee earns 400k or even a million dollars. As far as the employer is concerned for pension calcs anyone earning over 200k really only earns 200k as the key is we base all calcuations on pensionable earnings

Last edited by Hello World; 01-03-2016 at 07:34 PM..
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  #8  
Old 01-03-2016, 08:27 PM
bigb bigb is offline
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Quote:
Originally Posted by Hello World View Post
Bigb,
Yes correct its in respect to the employers contribution not the employee. But what must be within 75% of each other? The employers contribution in relation to ones pensionable earnings not the employers contribution in relation to an employee's salary.

I just don't see where you see my logic as flawed. All I am trying to say is that we don't care if an employee earns 400k or even a million dollars. As far as the employer is concerned for pension calcs anyone earning over 200k really only earns 200k as the key is we base all calcuations on pensionable earnings
Ok, I think I get what you are saying here. Sorry for the confusion.

Reading that paragraph again, I think you are correct that the basis in determining contribution %'s should be pensionable earnings. And then the restriction applies where the contribution %'s should be within 25% of each other. As an example of what I mean:

Assume firm has only two employees:
Employee A - Prior Year Earnings 400K, Pensionable Earnings 200K, DC contribution amount 30K, contribution amount as % of pensionable earnings 15%.
Employee B - Prior Year Earnings 75K, Pensionable Earnings 75K, DC contribution amount must be greater than or equal to 8,437.50, as this results in contribution amount as % of pensionable earnings of 11.25% (which is greater than or equal to 0.75*15% based on Employee A).

I actually did this wrong in my EOM, using the prior year earnings as the basis in determining contribution %'s. This however actually helped lower the spread in contribution rates among the various employees, so a little lucky there.

So to answer your question directly, yes, I agree the member contribution % should be based on pensionable earnings and not prior year earnings. Another item I would point out in general with the EOM's is you would be very unlikely to fail the submission solely on a misinterpretation such as this. I can guarantee I missed some of these nuances along the way with my submissions. Just make sure however you interpret the exercise, you document it in your work, and stay consistent with that interpretation and carry it throughout the entirety of the exercise.

Last edited by bigb; 01-03-2016 at 08:39 PM..
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