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John Feldt ERPA CPC QPA

Actuarial Increase for late retirement

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We came across a DB plan that uses a document (from a major provider) where the participant receives the greater of 1) the formula with continued service/salary or 2) an increase of 6% only per year on the normal retirement benefit. However, the plan's definition of actuarial equivalence is 7.5% GATT.

Can the plan have an actuarial equivalence definition where the post-retirement actuarial equivalence is something like:

"7.5% GAM 83 blended (50/50), but for purposes of actuarially increasing benefits after a Participant's Normal Retirement Date no mortality applies and 6% interest applies"

Would that be alright or would this violate something from those ancient proposed rules?

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Guest Steve C

So long as the plan has a valid Suspension of Benefits provision, and SOB notices are properly issued, the 6% adjustment should be fine. In fact, under those conditions the plan is exempt from having to provide any post-NRA actuarial adjustment until age 70-1/2.

My thoughts anyways.

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J4FKBC:

I don't pretend to know the answer to your question, but some years ago noted the following 1.401(a)(4)-3(f)(3)(ii) Example 1 in connection with the same question:

"Plan A provides a benefit of two percent of average annual compensation per year of service for all employees. In addition, Plan A provides an actuarial increase in an employee's accrued benefit of six percent for each year that an employee defers commencement of benefits beyond normal retirement age. For employees who continue in service beyond normal retirement age, the employee's two-percent accrual for the current plan year is offset by the six-percent actuarial increase, as permitted under section 411(b)(1)(H)(iii)(II). For purposes of this section, the actuarial increase (and hence the offset) may be disregarded, and thus all employees may be treated as if they were accruing at the rate of two percent of average annual compensation per year."

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This is not an uncommon provision, but I believe you are misinterpreting its meaning. However, without seeing the document, it is hard to say. A plan can clearly have an actuarial equivalence provision that has a different interest rate post NRA. If the plan provides that actuarial equivalence post NRA does not provide for a mortality increment, it should satisfy the 411(a) requirement that the benefit be at least the actuarial equivalent of the NR benefit and eliminate the need for suspension notices. All you are doing is removing the benefit of survivorship

Standard actuarial equivalence

(Benefit * Nx/Dx) * (Dx/Dx+1) * (Dx+1/Nx+1) = Benefit * (Nx/Nx+1) = Benefit at x+1

Removing benefit of survivorship

(Benefit * Nx/Dx) * (1+i) * (Dx+1/Nx+1) = Benefit * (1+i) * (APRx/APRx+1) = Benefit at x+1

In a plan that provides no forfeiture upon death, the arguement is that this is not only reasonable, but the proper actuarial equivalent

If however the plan provides that the actuarial equivalent adjustment going forward is simply Benefit * 1.06, it seems to me that could be deemed unreasonable at later ages .. but that would take some research

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