Determinations – Short Service Employees and Meaningful Benefits


In 2001 and 2002, the IRS became aware of separate plan designs which afforded either high percentage dollar allocations under defined contribution plans or maximized hypothetical benefit allocations under cash balance arrangements, targeted in both instances to key or highly compensated employees. In response, two pieces of guidance were issued regarding short service, low paid employees for the purpose of maximizing allocations to HCEs under cross-tested profit sharing arrangements. The IRS also issued additional guidance addressing cash balance designs.

Short Service Employees & Other Meaningful Benefit Schemes & AbusesPDF
A memorandum, issued on October 22, 2004, addressing certain schemes that effectively limit the amounts payable under a retirement plan to a small number of highly compensated employees (HCEs) by limiting participation under the plan to HCEs and to rank and file employees with short periods of service.

Clarification of Short Service Employee MemorandumPDF
Clarifies the October 22, 2004, memorandum regarding short service employees.

Section 401(a)(26) Issue Arising in Cash Balance Plan Determination Letter ApplicationsPDF
June 6, 2002, memorandum addressing questions raised about whether certain newly established defined benefit plans with cash balance formulas provide "meaningful benefits" for employees.