Social Security Offset situation

[Gary]

A plan provides a pension of 1.5% of avg pay per year and offsets it by 2/3 of the age soc sec benefit (with no pro-rate or unit accrual on the offset). As a result the accd benefit is less than zero for short service employees. The offset is computed based only on compensation with the employer.

Does anyone have knowledge or thoughts as to if the Plan can meet 411(B)(1) by doing the test just based on the gross benefit or must the offset be included in the test?. That is as a gross benefit only, it clearly passes 411(B), but tested based on the benefit including the offset, it would fail.

One case (allegedly) supporting the concept of ignoring the offset in the testing is rev ruling 76-259. This ruling, however, refers to offsets of benefits from profit sharing plans.

Look forward to any comments.

[RCK]

I was kind of surprised that you had not gotten a response to this post in nearly a week, so I'll take a shot at it.

I think that you have to test for 411 (B) compliance based on the net benefit, but you should not have a have problem passing. The regs say that you can do the projections using a static compensation figure and and static social security benefits, and it seem to me that if you do that your formula is essentially fractional. So your formula is not backloaded.

The bigger problem seems to be 401(a) (4) compliance. You don't have a safe harbor formula, so you have to do general testing of the net benefit. But in the course of that testing you do get to impute Social Security benefits. That's not to say that you will be able to pass--it should be interesting.

RCK

[Gary]

RCK,

I have been able to demonstrate that the above formula did not pass any of the 411 tests.

Furthermore, fyi, they compute the SS Ben based on base compensation years at terermination in the denominator. That is, not based on the usual 35 years. Thus the offset is made even higher due to this issue. In any event it did not pass 411 even if they used a SS Ben with 35 years in the denominator of the PIA calculation.

Gary

[RCK]

Ouch.

I mis-read the formula. I assumed that the formula was 1.5% of FAP times YOS less 2/3% PIA times YOS. Based on your second posting, and re-reading the first it must be 1.5% FAP times YOS less 2/3 PIA. Then you'd be right--this is not going to pass anything.

It's formulas like this that helped give us ERISA in the first place--the sponsor is implicitly claiming credit for 2/3 of the Social Security benefit, despite the fact that the employee paid for 1/2 of it, and any other employers that the employee had paid for their share.

RCK

[david rigby]

Yep, that's correct.

Of course, this (or any) formula can be made to pass the accrual rules of IRC 411(B) by putting a "project and prorate" around the whole thing.

[Gary]

Yes I too believe that a project and prorate could remedy this.

And the Plan administrator proposes this as a remedy.

However, there's more.

I have not been able to review what the administrator proposes as of yet. But I will say that I did a somewhat rough calculation of what I project the age 65 benefit to be and I arrive at a monthly age 65 benefit of about 1,200 and the Plan comes up with a benefit of $ 600. Something obviously is going on. The administrator said that the age 65 offset is based on 70% of the sum of the SS ben plus the Tier 2 benefit (since this is a railroad plan) and is much greater than simply the SS offset aspect. The reason why only the SS offset was applied to the accrued to date method was because the Tier 2 portion does not come into play until the employee has at least ten years of service. And was not applicable in the accd to date method and is applicable in the age 65 project and prorate method. At this point I am a bit confused and clearly need to learn some facts about how this offset works and if what they are proposing is reasonable. Somehow I don't like it, but we'll see if their facts are in order.

Any comments to this?

[RCK]

Gary,

My only comment is that I don't know anything about Railroad Retirement benefits, so Tier 2 does't mean much to me.

Intuitively (which means that I don't have any facts to confuse me). I'm back with part of my original observation. You're still going to have to do general testing to pass 401(a)(4), and you can impute Social Security benefits, but only SS benefits. I'd guess that passing 401(a)(4) is going to be tough.

RCK