Reduction of Accrued Benefit (but not by amendment)

[Guest kjk]

Under a benefit formula that provides that average annual compensation means the high five of the immediately preceding 10 years of compensation, can an accrued benefit be reduced on account of decreased compensation late in a participant's career? I am concerned not with 411(d)(6) (regarding cutbacks resulting from amendments) but with 411(B)(1)(G), stating that an accrued benefit cannot be reduced due to an increase in age or SERVICE (this particular individual would have had a much higher benefit under the Plan if she had retired 10 years ago when her comp was high instead of continuing her service with the company).

Now here's an added twist: what if the individual has been receiving workers' compensation benefits for the past 10 years (and therefore has no plan compensation), can her benefit be reduced to zero? This doesn't seem palatable given ERISA's intended purpose of protecting employees' retirement benefits, and yet this is the conclusion I am reaching. Has anyone encountered a similar scenario? Any advice or guidance would be very much appreciated!

[david rigby]

I don't think that code citation is applicable to your fact set.

Yes, a benefit can decrease as a result of lower compensation, usually over an extended time period.

However, also look at IRC 411(a)(9), where the normal retirement benefit cannot be less than any early retirement benefit.

With respect to your comment about worker's compensation, is the employee also receiving wages? Most defined benefit plans use a formula to define a benefit at an event date, typically retirement, death, disability, or other termination of employment. If the employee in question had a severance of employment, then that would be the event at which the plan would determine the benefit. In most cases, nothing that happened after that time would alter the amount of the benefit (although it might be forfeited upon death prior to attainment of retirement age).