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Applying Benefit Service Limit Across Multiple Formulas


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DBP amends its final pay formula as of 12/31/2012 and provides a new/better final pay formula effective 2013. The accrued benefit as of 2012 is frozen - benefit service and final average earnings - so total accrued benefit is A+B. However, the plan also limits benefit service to 25 years but does not specify how that limit applies with respect to the pre-2013 and post-2012 benefit formulas. The prior actuary (it's always a takeover case) applied the limit on the latest service. 

Extreme theoretical example, a person hired in the 1980's could hit the service cap under the old formula, work another 25 years (so 50 in total) and not accrue another cent, while a new hire in 2013 could work 25 years all under the new formula and have a substantially higher benefit than the 50-year employee.

Putting the fairness argument aside, are there any statutory issues of concern here? If so, would it matter if the pre-2013 FAE was not frozen so that the service-limited person's benefit could increase for salary increases?

Thank You and Happy New Year!

Kenneth M. Prell, CEBS, ERPA

Vice President, BPAS Actuarial & Pension Services

kprell@bpas.com

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It seems to me at a minimum the 204(h) notice would have been required to describe the potential effect. Also, this strikes me as one of those where a really close reading of the plan document, as amended, may support one or the other interpretation, probably not the former actuary's. There are other potential legal problems.

Luke Bailey

Senior Counsel

Clark Hill PLC

214-651-4572 (O) | LBailey@clarkhill.com

2600 Dallas Parkway Suite 600

Frisco, TX 75034

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ERISA includes a provision that states ambiguities should be resolved in the participant's favor.  Could this be the reason for the prior interpretation?

I'm a retirement actuary. Nothing about my comments is intended or should be construed as investment, tax, legal or accounting advice. Occasionally, but not all the time, it might be reasonable to interpret my comments as actuarial or consulting advice.

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45 minutes ago, david rigby said:

ERISA includes a provision that states ambiguities should be resolved in the participant's favor.  Could this be the reason for the prior interpretation?

No. 

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