Accrual of Benefits after going into pay status

[Guest Dayon]

In a DB Plan if a participant returns to work after going into pay status (collecting retirement benefit) and meets all eligibility requirements for the plan would the monthly benefit then be adjusted according to the extra years of service and salary amounts seeing that the benefit amount is solely based on these two items? In the plan document the only provision that even comes close to answering this question is under Suspension of payments...which by the way are not allowed. The Employer is not even sure of the answer! This is my first year administering this plan and I can not find anything to support an answer.

[david rigby]

Most plan documents will have provisions which address suspension of benefits, and what to do upon rehire. These are related but are not necessarily the same. Common provisions upon rehire would include accrual of service and also a provision to offset the value of the additional accrual by the amount of the benefits already received. Note, such offset is common but not required. My understanding is that it must be in the plan document in order to be applied.

Usually, rehire will also cause a suspension, but not necessarily.

Another point, accrual of service might (under the terms of the plan) require that the employee work a minimum hours during the year. For example, a retiree who is rehired on a part-time basis might not be expected to work this minimum (1000 is common). In this case, it might not make sense to suspend the payments.

[MGB]

In looking at the plan document and trying to integrate law into the decision, be very careful about terminology.

"Suspension" is a defined term under ERISA. Stopping the benefit payments when reemployed is NOT what suspension means. Suspension means forfeiting benefits. Suspension is an exception to the vesting requirements.

When reemployed, four things can occur. 1) Suspension (stopping payment with no future adjustment for the stopped payments), 2) continued payment with offset to the future accrual of benefits for the benefits paid (which is a form of suspension), 3)continued payment with no offset to accruals, or 4) stopping payments with later resumption of an actuarial equivalent of the stopped payments.

In all four of these situations, you must give additional accrual for service and earnings on top of whatever you do with the already accrued benefits. The only exception is when the formula has some type of cap (e.g., maximum years of service in benefit formula). Of course, even though additional accrual occurs, it may be offset by benefits paid under situation two. Suspension rules have been around since ERISA. The continued accrual rules are separate and have only been around since OBRA'86.

In the first two situations, you may only do this if the plan is clear about it, the SPD describes it, and the individual was given the proper notice that their benefits would be suspended when they returned to work. Note that you do not have to stop the benefit payments to cause a suspension of benefits (offsets to future accruals is a suspension of benefits).

The latter two situations are equivalent in value; it is only the timing of paying the person that changes. You do not need to give a suspension of benefits notice to stop payments if the actuarial equivalent is paid later upon the second retirement. Again -- stopping payments is not a suspension of payments.