411(b) and offset plan

[Gary]

A plan is 1.5% of avg pay less 2/3 soc sec annuity.

The Plan fails 401(l) as many individuals have a zero accrued benefit in the early years.

However, for 411(B) (minimum accrual) purposes can the offset be ignored?

[Mike Preston]

I don't think it is ignored, but you may not have a problem with it, either. Is this a holdover from a pre-TRA plan design that was based on integration under 71-446? The offset was allowed to be as much as 74.07%. Those plans passed 411(B) only on the basis of the fractional rule, as the other rules didn't work. So, assuming you apply the rules of 1.410(B) applicable to social security offsets (things are expected to stay the same in the future) and you accrue the benefit using the fractional rule, if the result is that the benefit in the early years turns out to be zero you still satisfy the rules. This is going back a ways, so let me add that all of this should be appended by "IIRC".

[Gary]

It is a pre tax reform plan and probably was designed with 71-446 in mind. My understanding with 71-446 you could have an offset at normal retirement as much as 83 1/3 %, with it reduced for early retirement.

Except with this plan it has a unit accrual for the gross benefit and a projected accrual for the offset. That's why the accd ben is less than zero for a long period and that's why I feel it fails 411(B).

I do feel if they (amend plan) use a method that projects the benefit to normal retirement and then applies a service prorate, then the formula may be reasonable.

Although this is a railroad plan and at 65 it incorporates an offset that is much higher (that is after 10 years of service). This offset is 70% of the railroad benefit and not the soc.sec. benefit. SO the result is that the age 65 benefit is not nearly as high as under the original soc sec offset formula, due to the much larger railroad offset.

Any thoughts?

[Mike Preston]

Interesting. Does it have a TRA'86 LOD? If so, at least you should have reliance until you submit for GUST. I have no familiarity with railroad plans or offsets related thereto. Maybe there is some exception that applies. Have you charted out the 411(B) accrual pattern for each potential participant in the plan? Is there a minor modification you can make such that the plan sponsor retains as much of their design as possible? Do you have access to the design team that set this up? If so, have you asked them how the design meets the accrual requirements of 411?

On the offset thing, you are correct that the basic offset percentage was 83.33%, but in order for that percentage to be used one must be dealing with a plan that had absolutely no death benefit. The smallest reduction in the integration percentage was typically for a plan with a lump sum benefit and a single life annuity as the normal form payable at age 65. In that case, you ended up 74.07%. I suppose it is possible to have the 83.33% factor actually in use (or some other number higher than 74.07%), I just never ran into a plan that did so.

Good luck.

[Gary]

Thanks Mike. It is not a plan I administer, but I am helping one of the former employees. And when I chart the 411 pattern for my client it failed. SO that is why there is consideration to amend the plan to compute accd benefits based on the project and prorate technique. And I was thrown off by their response, since the accb ben this way resulted in a lower accd ben then when I did it. And this was due to the higher railroad offset, which I don't know of as of yet either.