Suspension of Benefits for Late Retiree

[jwallace]

Participant is age 78 and Final Average Pay for 3 years is $50,000 in 2002. Late retirement in the plan is the greater of The Actuarial Equivalent of the NRD benefit and the Benefit calculated at Actual Retirement. The Act Equiv bft in 2002 is $51,000 and the actual retirement bft is much lower. The Actuarial Equiv bft in 2001 was $47,000 (immaterial to this example, but it does show that last year the Act Equiv bft was less than the 415 limit). Therefore, her bft is $51,000. However, since I cannot exceed the 415 limit of 100% of 3 year pay (which is the $50,000 number above), I believe that I need to provide her with a Suspension of Benefits notice as described in IRC Sect 411(a)(3)(B) and further explained in DOL Reg 29 CFR 2530.203-3(a)(4). Also, the client only allows for in-service withdrawals to participants over age 65 and working less than 40 hours a month.

Questions:

1. Do you agree that a Suspension of benefits notice needs to be issued to this participant?

2. If so, does anyone have a sample notice that may have covered this type of occurrence?

[MGB]

Yes, this is a situation where you must either pay the person out a distribution for the year or provide a suspension of benefits notice. However, you can only do either one of them if the plan states that. Does the plan have suspension of benefits language in it? If not, it needs to be amended (along with most plans in this country) to provide suspension of benefits when the 415 limits don't work out. Without such language, the participant has an ERISA claim against the plan for the full actuarial increase even though the IRS doesn't allow the higher benefits. One of the two provisions must be in the plan: suspension or payment. The old approach of avoiding suspension by providing an actuarial increase is not technically correct and all plans need suspension language in the document to deal with 415 issues. In particular, now that the 62 to 65 limits are the same, suspension will be more common.

[Gary]

if the plan states that it provides the act equiv. i don't think a suspension notice would preclude that provision. unless plan were amended to provide suspension and it removed the act increase provision.

as far as 415 goes. i have never had to deal with that for an act increased pension. and i am not sure if you can exceed 415 under these circumstances. maybe you can.

[Guest Harry O]

MGB-

What is the authority for saying that the old approach of actuarially increasing the NRB is not "technically" correct? The IRS has issued some *proposed* regulations and a Notice interpreting the*proposed* regulations (the Notice concerning post-age 70.5 adjustments) but nothing binding on taxpayers that I am aware of. Of course, the recently issued proposed 411(B) regs will make this procedure technically incorrect . . .

Incidentally, the courts are starting to reject claims for actuarial increases by late retirees who failed to receive a suspension notice. The Sixth Circuit and the NJ District Ct. (unreported as of now) have so held.

[Gary]

harry o,

tell me about the new 411(B) proposed regs? i know of proposed regs that explained the annual actuarial increase to plan benefits, but was has since come down the pike?

apparently you say some courts are not giving the actuarial increase when the suspension notice is not provided.

thanks

gary

[MGB]

Harry O,

It is not technically correct because the actuarial increase cannot exceed 415 limits. Therefore, when the 415 limit causes you to not give a full actuarial increase, you are not complying with the rules for being able to ignore suspension of benefits. In this case, you technically are suspending benefits, albeit due to the IRS forcing you to, not because the plan was designed to.

The IRS pointed out this problem (Rev. Rul. 2001-51) in the context of the new 62 to 65 flat 415 limit under EGTRRA combined with an NRA under 65.

[david rigby]

Link to that Rev. Ruling

http://www.benefitslink.com/IRS/revrul2001-51.shtml

[Guest Harry O]

I'm sorry. I think I misread MGB's post. I thought he was saying that you couldn't (ignoring section 415 for the moment) pay the greater of (1) NRB actuarially increased to actual retirement date, or (2) plan benefit for all service. This was not what MGB was talking about, so my apologies for moving us off topic.