Protected Benefits

[Spodie]

Would changing the Normal Retirement Age on a 401(k) Plan from age 62 to 65 be considered a Protected Benefit under IRC 411(d)(6)? The plan does not have Early Retirement.

Thank you!

[david rigby]

Yep.

[Spodie]

To expand a little further; can we make the change (age 62 to 65) with the EGTRRA Restatement prospectively (01/01/2010). Annd then mark the section regarding protective benefits as follows: Normal Retirement Age was changed from 62 to 65 effective January 1, 2010. This applies to employees hired after January 1, 2010.

[Guest Sieve]

Your suggested approach would be OK. Likewise, it would be OK to move NRA to 65 for benefits accrued on a prospective basis, and retain age 62 for benefits already accrued, so that some participants had an accured benefit with an NRA of 62 and another accrued benefit with an NRA of age 65.

[Spodie]

Oh my this is turning into a more complex question. For example; If on the date of the amendment you had an account balance of $20,000, this would be what you had accrued with an NRA of 62. When you turn 62, assuming you are still working for the same Employer, you could take out $20,000. Anything you accrue after the date of the amendment wouldn’t be available until age 65. What my example doesn’t do is take into consideration gains and losses on that $20,000 account balance from the date of the amendment to the date you turn age 62. Also, would you freeze the account on the date of the amendment and start a new account for all eligible employees with an account balance and post all contributions that occur after the date of the amendment?

Thank you so much for the responses!

[Guest Sieve]

If you wanted to perform a pre-amendment/post-amendment tracking so that you could change to NRA 65 on a prospective basis only, for all benefits accrued after the amendment, then you would have to have a bucket for each. Remember, full vesting occurs at NRA, too, so your amendment would potentially be changing the vesting schedule, so I assume that those with 3 y/s (I think it is) should be able to retain age 62 NRA for vesting purposes for all contributions.

I think--but am not sure--that earnings on the pre-amendment assets could be posted to the post-amendment bucket if that's what the plan provided. I believe there's something in the anti-cutback regs about it--maybe someone knows & will post.

[Kevin C]

I think the future earnings on the pre-amendment balance would also be protected. I thought the regs would be more clear, but the following is all I could find:

1.411(d)-3(a)(4)Example 4. (i) Facts. (A) Employer O sponsors Plan D, a qualified profit sharing plan under which each employee has a nonforfeitable right to a percentage of his or her employer-derived accrued benefit based on the following table:

Completed years of Nonforfeitable

service percentage

Fewer than 3 ........ 0%

3 ................... 20%

4 ................... 40%

5 ................... 60%

6 ................... 80%

7 ................... 100%

(B) In January 2006, Employer O acquires Company X, which maintains Plan E, a qualified profit sharing plan under which each employee who has completed 5 years of service has a nonforfeitable right to 100% of the employer-derived accrued benefit. In 2007, Plan E is merged into Plan D. On the effective date for the merger, Plan D is amended to provide that the vesting schedule for participants of Plan E is the 7-year graded vesting schedule of Plan D. In accordance with section 411(a)(10)(A), the plan amendment provides that any participant of Plan E who had completed 5 years of service prior to the amendment is fully vested. In addition, as required under section 411(a)(10)(B), the amendment provides that any participant in Plan E who has at least 3 years of service prior to the amendment is permitted to make an irrevocable election to have the vesting of his or her nonforfeitable right to the employer-derived accrued benefit determined under either the 5-year cliff vesting schedule or the 7-year graded vesting schedule. Participant G, who has an account balance of $10,000 on the applicable amendment date, is a participant in Plan E with 2 years of service as of the applicable amendment date. As of the date of the merger, Participant G's nonforfeitable right to G's employer-derived accrued benefit is 0% under both the 7-year graded vesting schedule of Plan D and the 5-year cliff vesting schedule of Plan E.

(ii) Conclusion. Under paragraph (a)(3) of this section, the plan amendment does not satisfy the requirements of this paragraph (a) and violates section 411(d)(6), because the amendment places greater restrictions or conditions on the rights to section 411(d)(6) protected benefits with respect to G and any participant who has fewer than 5 years of service and who elected (or was made subject to) the new vesting schedule. A method of avoiding a section 411(d)(6) violation with respect to account balances attributable to benefits accrued as of the applicable amendment date and earnings thereon would be for Plan D to provide for the vested percentage of G and each other participant in Plan E to be no less than the greater of the vesting percentages under the two vesting schedules (for example, for G and each other participant in Plan E to be 20% vested upon completion of 3 years of service, 40% vested upon completion of 4 years of service, and fully vested upon completion of 5 years of service) for those account balances and earnings.