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New IRS Position on Post-NRA Accruals? (2009 Gray Book, Q&A 39)

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Is anyone else fielding questions about the attached Q&A from 2009 ASPPA conference? In it, the IRS representative took the position that a traditional DB plan that does not issue a § 203(a)(3)(B) suspension notice at NRA, but instead provides for continued accruals at the same rate as pre-NRA, must pay both those continued accruals and actuarially increase the benefit year-to-year.

Our experience is that a great many plans in this situation provide the greater of continued accruals or the actuarial incease; that is, they offset the continued accruals by the amount of the actuarial increase. They do so without mentioning the offset, and they do so whether the plan (i) provides for a suspension notice (which the administrator fails to send), or (ii) simply doesn't provide for a suspension. The IRS is taking the position that the plan cannot use the greater-of approach at all, unless the document specifically provides for it.

The IRS's rationale is that the plan says the participant gets continued accruals, so ERISA (and the Code) requires the plan to provide them. Period. ERISA and the Code also require the participant to be made economically whole for the "suspended" payments. Period. The regs (which regs is another question--see below) offer a means of offestting the adjustment against the accruals, but to use that method the plan must contain language describing it.

I can see the IRS's point: the plan requires the continued accruals, and there's an extrinsic legal requirement to either issue a notice or pay the "actuarial increase." The rubber meets the road when you calcuate the increase, however.

One can read the 1988 proposed regs (see § 1.411(b)-2(b)(4)(iii)(A)) as requiring the plan to provide for the greater-of approach. The language is pretty soft ("A plan may provide . . ."), but I can sort of get there. I don't think it's the only reading--or that most lawyers and actuaries have read it that way.

I don't see a similar requirement in the 2002 proposed regs. Maybe I'm missing it.

I'm also confused by the fact that the IRS seems to be opining that the 2002 proposed regs control. The 1988 proposed regs were generally effective as of 1/1/1988; the 2002 proposed regs state quite clearly that they are not effective until final regs are issued. It seems like the 1988 regs (which generally require a smaller actuarial increase) are at least as authoritative as the 2002 regs (becuase they actually have an effective date), but that a good faith interpretation of the statute is still permissible, given the absence of any final regs.

And unless I'm mistaken, industry practice is well settled the other way--i.e., plans use the offset without specifically providing for it, both to correct the failure to send suspension notices (in plans that call for them) and to calculate late retirement benefits (in plans that don't). Note that EPCRS has approved a number of corrections for failure to provide suspension notices since 2000, and according to the annual Ernst & Young index of these corrections, the "greater-of" approach was used to calculate the corrective payments.

Any comments appreciated. Thanks.

2009_Gray_Book_QA_39.pdf

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Just to clarify: Is the IRS position that at the end of each year, the Plan provide the greater of the formula accrual or the actuarial increase of the (greater) benefit at the end of the prior year so that in effect each years accrual flows into the actuarial increase formula?

The Plans I've seen specifically provide this mechanism or the great of the ab at termination or the actuarial increase of the NRB.

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Just to clarify: Is the IRS position that at the end of each year, the Plan provide the greater of the formula accrual or the actuarial increase of the (greater) benefit at the end of the prior year so that in effect each years accrual flows into the actuarial increase formula?

The Plans I've seen specifically provide this mechanism or the great of the ab at termination or the actuarial increase of the NRB.

I don't think the agent is clear about how to calculate the offest (which is actually a side issue for me). If I had to guess, I'd say the agent's position is that (unless your plan expressly provides for the offest) the participant gets, as of the end of plan year 2, the [Delta in the formula benefit from the end of plan year 1] plus [the amount of the actuarially increase in the benefit since the end of plan year 1]. That reflects the (more expensive) approach in the 2002 regs. (And if the plan expressly provides for the offset, you could use the greater of the two Deltas for the plan year.) It's hard to tell here because the Question suggests a calculation method that the agent says isn't available, without suggesting another one. All the agent really says is that the offset implicit in any greater-of calculation is unavailable unless the plan expressly provides for it.

And that's my real question: must the plan expressly provide for the offset? I don't see that requirement in the statutory provisions, which just seem to tell you (i) that the offset is available, and (ii) it will apply pursuant to regs the IRS will issue:

In the case of any employee who, as of the end of any plan year under a defined benefit plan, has attained normal retirement age under such plan . . . if distribution of benefits under such plan with respect to such employee has not commenced as of the end of such year [on account of his or her termination of employment] , and the payment of benefits under such plan with respect to such employee is not suspended [by means of a suspension notice], then
any requirement of this subparagraph for continued accrual of benefits under such plan with respect to such employee during such plan year shall be treated as satisfied to the extent of any adjustment in the benefit payable under the plan during such plan year attributable to the delay in the distribution of benefits after the attainment of normal retirement age
. The preceding provisions of this clause shall apply in accordance with regulations of the Secretary.

Code § 411(b)(1)(H)(iii).

And since there are still no effective regulations (or even Rev. Ruls. or Notices that I know of), I'm not sure how much weight to give this one agent's opinion about the plan document requirement.

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I believe the rule requiring that benefits be definitely determinable would apply here, any discretion taken that is not stated as permissible within the plan would violate this rule.

https://www.law.cornell.edu/cfr/text/26/1.401%28a%29-1

(b) Requirements for pension plans

(1) Definitely determinable benefits.

(i) In order for a pension plan to be a qualified plan undersection 401(a), the plan must be established and maintained by an employer primarily to provide systematically for the payment of definitely determinable benefits to its employees over a period of years, usually for life, after retirement or attainment of normal retirement age (subject to paragraph (b)(2) of this section).

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