post normal ret age act increases

[Gary]

1.411(B)-2 sets forth a method for computing and applying an actuarial increase for retirement after age 65, as a minimum accrual, if no suspension of benefits notice is provided.

my question is s/ this act increase include a mortality assumption during the deferral period?

i.e if a person retires at say age 70 (simplified for purposes of this discussion) s/ the act increase look like which one below?

a) N65/N70 (with mortality)

or

b) (1+i)^5 * a65/a70. (without mortality)

any comments?

gary

[Guest Keith N]

I generally use N/N (with Mortality). I don't think I've ever considered the w/out mortality approach. The only time I use w/out mortality is to adjust the 415 limits for early ages. Post 65 415 limits are adjusted w/ mortality (I think).

We also use mortality for 99% of the lump sum discounts, but then the documents tend to be a little clearer.

[Blinky the 3-eyed Fish]

This question intrigued me because I hadn't thought about it before. Most of the plans I work on are small and do not have pre-retirement mortality assumptions.

I do the calculations opposite of Keith, without mortality, for both the actuarial increase and 415 limits past SSRA.

[david rigby]

I thought this is a plan definition issue.

[Gary]

yes, my understanding is that for post ssra 415 calculations you do NOT use mortality for the deferral period.

thanks for the feedback about the general post age 65 act increases.

[Blinky the 3-eyed Fish]

Pax, none of our documents specify how the actuarial increase is made, only that it needs to be made.

[david rigby]

If the document does not say, then the sponsor is put in the position of interpreting a phrase like "actuarial equivalent". That could be problematic, especially if the interpretation includes mortality pre-retirement but excludes it post-retirement.

I come down in favor of being specific in the document.

[Guest Keith N]

Regarding 415 limits... Rev. Proc. 87-21 Q/A 5 & RR 98-1 Q/A 9 are both fairly clear that "the mortality decrement may be ignored to the extent that a forfeiture does not occur at death." It doesn't say I must ignore it. It's to the individuals benefit to ignore it prior to Retirement Age and to recognize it after Retirement Age.

I have never had an IRS agent question this procedure.

Also, the 415 maximums are annual benefits, not monthly so you can use an N instead of an N(12) to determine the max lump sum. This is usually good for 4% or so.

[mwyatt]

As far as the post-retirement 415 adjustment goes, the use of the mortality decrement(s) hinges on the death benefit provided by the Plan. From my experience, we haven't seen too many plans where the beneficiary isn't entitled to the PVAB post NRD where the benefit runs up to the 415 limit. In this case, you ignore mortality decrements in determining the post SSRA (now 62-65) adjustment to the 415 $ limit.

[Gary]

so for general post age 65 (not 415) act increases we seem to have no authoritive consensus. and as far as 1.411(B)-2 is concerned, i have not received any comment regarding its intent w/r/t post age 65 mortality.

thanks for the feedback.

[Guest Doug Goelz]

Just a quick comment on the post-retirement adjustments to the 415 limit...Q&A 6 of Rev.Rul.98-1 specifically states that "to the extent that a forfeiture does not occur upon death, the mortality decrement...must be ignored after SSRA."

[Guest HarveyC]

1.411(B)-2, as proposed in 1988, indicates that the post-NRA actuarial adjustments are to be made on a plan year by plan year basis where you take the greater of the actuarially increased benefit vs. that with continued accrual. Alternatively, it indicates that one can skip the year by year adjustment and do a single comparison (actuarially increased normal retirement benefit vs. benefit with continued accrual) at retirement.

Do the 2002 revisions to the proposed regs do away with the alternative of the one time comparison at retirement?

[MGB]

The new regs (note that the 1988 regs will be thrown out when the new ones are finalized) do not allow an aggregate approach. I've been in discussions with the reg authors a couple of times and they are adamant that everything is focused on annual calculations. However, I don't think the new regs are very clear on the algorithms for actuarial increases like the 1988 regs were.

I disagree that the 1988 regs allow an aggregate approach. Its examples very clearly do year-by-year comparisons. (I am very familiar with those regs because I provided the EA meeting sessions on them a couple of times following their release.)

[Guest HarveyC]

Thanks for you input, MGB. I've recently spoken to an ERISA attorney who also is adamant against the aggregate approach.

On another but related issue, what do you do if the plan was contributory during a prior period? Each year, when comparing the accrued benefit per plan formula vs. actuarially increased prior year benefit, do you simply look at the total benefit or must you break out the portion of the benefit attributable to employee contributions and do separate comparisons for the employee-derived portion and employer-derived portion?

[Blinky the 3-eyed Fish]

Focusing on MGB and Harvey's last comments, I would like to get some thoughts on this situation.

The DB document we use for clients provides for the aggregate approach to calculating the actuarial increase for late retirement benefits. I don't necessarily agree with this approach. However, I feel I am stuck following the document, which has an approval letter.

Would anyone handle it differently?