Offset Plan

[Gary]

I am reviewing a pension distribution for a participant.

A plan provides an offset based on a family soc sec offset. never seen this anywhere else before.

This is where the retiree's offset is based on a soc sec benefit that is greater than his own individual benefit due to an increase based on the spouse's higher soc sec benefit.

anyway the plan provides a basis socs sec offset untila ge 62 and then adds an additional offset at age 62 as a result of the spouse's soc sec benefit.

the plan says that in no way can the actual offset exceed what's is permitted by the Code.

Well it appears that the actual offset exceeds what is the maximum amount permitted by 401(l) at the early ret age of 57 and again after the additional family soc sec offset at age 62. This occurred because the offsets weren't reduced much from the age 65 offset and would exceed the 401(l) required max offsets at the early ret ages.

My question is: does my logic appear solid and when they refer to the max permitted by code is it generally reasonable to apply 401(l)? I am presuming at this time that 411 accrual rules are not violated. Of course they may just mean that it passes 401(a)(4) non descrimination and the hell with 401(l).

Curious to get any thoughts on this.

Thanks.

[mbozek]

I though that compliance with 401(l) is only required if the plan complies with the safe harbor non dscrimination rules under 410(a)(4). A plan that uses an integration formula that does not comply with 401(l) need only comply with general testing under 401(a)(4), e.g., cash balance plans that use dc integration. Reg. 1.401(l)-1(a).

[AndyH]

Yes, agreed. Gary, I think you found a one footed dinosaur (the only one of it's kind). I've never heard of such a thing. It would seem that the plan is setting ambiguous requirements that are outside of mainstream regulation.

[david rigby]

Not necessarily. The original post stated "...no way can the actual offset exceed what's is permitted by the Code."

That does not imply 401(l), although it is possible that prior administrative practice treated it as such. Perhaps a first step is to carefully determine the plan language and the prior administrative procedures.

[AndyH]

Isn't it true that virtually any offset is permitted by the code if it passes the applicable tests, e.g. 401(a)(26), a(4), etc.? But there was a point in time that this probably referred to 401(l), yet I don't recall a "family offset" offset option being available under 401(l). So I think that this says whatever one argues it says.

Gary, how about SPD examples? Any?

[Guest Harry O]

Unfortunately it is not true that virtually any offset is permitted as long as you pass the nondiscrimination tests. You still have to worry about the vesting and accrual rules. Compare Reg. 1.411(a)-4(a) (which permits offsets for social security or any other federal or state law) with the subsequently issued Temp. Reg. 1.411(a)-4(a) (which deletes the reference to social security and other laws and instead limits offsets to those allowed under section 401(l)). The IRS purposely issued the reg this way in an attempt to ban PIA offset plans and workers comp offsets. The penison community protested and I think that this portion of the temporary regulation is not yet effective (I'd have to work my way back through the history to confirm my recollection).

[mbozek]

I dont understand how Treg 1.411(a)-1 can limit non SS offsets since many qualified plans with determinaton letters permit offsets for for WC, severance, ESOP benefits and other forms of payments. Futher Fed cts have upheld offsets from qualfied plans for severance payments, life insurance commissions and mandatory termination payments required under foreign law as not being a reduction of a vested benefit. Since the IRC does not define the benefit formula that can be adopted by an employer why should certain offsets be prohibited? In practice the offset is part of the benefit formula.

[Guest Harry O]

I agree that plans have DLs on these provisions. But we both know that is not dispositive. The IRS points to the change in 401(a)(5) as part of TRA '86 as justification for their position (eliminated reference to federal and state laws and replaced it with specific reference to 401(l)). In addition, DC offsets were expressly blessed in RR 76-259 (which addressed the accrual rules). Finally, I would think offsets for severance pay would violate ADEA but I am not an expert here . . .

The basic issue, I think, is whether you can test the "gross" benefit formula for purposes of satisfying the accrual rules or whether you have to test the "net" benefit. The IRS has blessed using the gross formula in RR 76-259 for certain DC offsets. Outside of this, you need to hunt for similar exceptions in case law or regulations.

[mbozek]

Where does the IRS note this change as a basis for limiting offsets? Under reg. 1.401(a)4-(8)(d)(1), a net DB plan benefit can pass discrimination testing under either a contributions or benefit basis. How is an offset for benefits paid under another program a different event from a reduction in retirement benefits due to a reduction in final average pay, e.g. employee goes out on strike prior to retirement? Finally I dont think that conditoning a DB benefit on payments from another source is is a right which would be subject to forfeiture within the meaning of the regulation. The temporary reg only eliminated the language for offsets with regard to benefits payable under fed or state law. Prior to the temp reg. IRS routinely approved plans with offsets for other non govt income sources including commissons paid, termination payments under foreign law and severance payments.