How is benefit calculated when participant continues working past norm

[Guest cwood]

We have a defined benefit pension plan that wishes to allow employees who have reached the age of 70.5 to continue working and earn a salary while at the same time begin receiving their pension benefits. How would we amend the plan to allow for this? In particular, how would benefits continue to be accrued while pension payments are being paid?

[Gary]

I believe you can have pensions accrue much like they do in accordance with proposed reg 1.411(B)-2 with respect to accruals after normal retirement age.

Basically they continue to accrue benefits and at the end of each year they are entitled to the greater of the prior year's benefit or the new gross accrued benefit offset by the actuarial equivalent of the benefits received during the prior year.

[MGB]

You would not offset for the actuarial equivalent of benefits already paid.

The only time you do this is if you are suspending (forfeiting) benefits. In that case, you must provide the notice to the participants that they are forfeiting value by continuing to work.

It did not sound at all like that is what he wanted to do. It sounded like he wants to pay them with no loss of value and continue to accrue benefits, in which case, there is no actuarial offset.

The amendment is very simple. Just say that benefits will begin at age 70.5 and that future benefits are increased each year for any additional accrual. Remove any language in the plan that describes actuarial increases after age 70.5 for actives receiving benefits and remove any language of suspension of benefits (or actuarial offsets) for actives receiving benefits after age 70.5.

[david rigby]

I agree, except that I think the commencement of benefits is at the option of the employee: "... benefits may commence..."

Another variation is that the plan could be amended to permit commencement at NRD, but cannot permit commencement at ERD, assuming this is a qualified plan. Thus, in the original situation, we are assuming the 70-1/2 employee is at or beyond NRD.

[rcline46]

For MGB (fun car by the way):

Why would you not reduce by the actuarial equivalent of benefits received? For owners receiving RMDs and still working we have had benefits reduced by the RMDs. IRS approved methodology on plan termination just last year (RMDs had been done for 12 years on the plan).

Regular benefits would be treated the same, would they not?

[MGB]

You "can" offset by benefits received, but you do not have to. That is the only point I was making. It sounded like the intentions were to be more liberal in the original question.

For those over 70-1/2, you are required to give an actuarial increase if you do not pay them out. You also must provide additional accruals under OBRA'86. You are allowed (not required) to only give the greater of the two. But, you are also allowed to provide both (actuarial increase + new accruals).

If you pay the person out, and provide new accruals, this is equivalent to providing both an actuarial increase and new accruals (more liberal than the minimum required). In other words, if you actuarially increased the benefits and then offset for payments received, they offset each other, resulting in just having paid them out (plus still giving them new accruals).

In the case where you do not pay out: If you only give the larger of the actuarial increase or new accruals (the minimum required), then RMD's for owners need to have the actuarial equivalent of the payments offset against this calculation. Otherwise, you would be treating the RMD's more favorably (equivalent to giving both an actuarial increase + new accruals) than nonowners that continue working (who only get the greater of the two).