Permitted Disparity

[david rigby]

I'm having a brain cloud (remember the movie "Joe vs. The Volcano"?).

Please help me recall the reg. cite that tells us a DB accrued benefit (for example in an excess plan) cannot decrease solely due to the increase in the SS wage base.

Thanks.

[MGB]

There used to be an explicit section of 401(a) that stated that a benefit may not be decreased due to a change in Social Security, but I don't think it is still there after 1986 because it fit in with the old integration rules.

The following is from the 2003 EA Gray Book. I think the same principle applies to any part of the calculation of the accrued benefit. In other words, no future changes may decrease what is already accrued.

QUESTION 33

Other DB Issues: Reduction in Accrued Benefit

A plan defines average compensation as the average pay during the last 5 (not highest 5 of last n) years of employment.

a) If the participant took a pay cut such that his last 5-year average is less than such average determined in previous years, would it be permissible to reduce the accrued benefit solely on account of such pay cut?

b) Does it matter whether the lower accrued benefit occurred while the employee was eligible to retire early since, as evidenced by Example 4 in Reg. 1.411(a)-7©(6), a less restrictive rule applies -- a participant’s normal retirement benefit may not be less than the greatest annual benefit the participant would have been entitled to receive at any earlier age?

RESPONSE

a) No, the accrued benefit may not be reduced.

b) No, it doesn’t matter.

[Guest DFerrare]

From Section 3 of the preamble to the 401(l) regs.:

The regulations provide that compliance with section 401(l) does not allow a plan to decrease any employee's accrued benefit in violation of section 411(d)(6) and section 411(b)(1)(G). Commentators requested removal of the reference in the proposed regulations to an increase in covered compensation as an example of a decrease in accrued benefit. They believe section 411 does not prohibit a decrease in accrued benefit resulting solely from an increase in covered compensation.

After considering the comments, the Treasury and the Service have determined that the regulations under section 401(l) are not the proper vehicle for addressing the correct application of section 411 to this situation. Accordingly, the reference to an increase in covered compensation has been removed from the regulations, but no inference should be drawn from this revision as to the correct interpretation of section 411.

David

[Guest Harry O]

MGB -

Do you agree with the IRS's response in (a)?

Unless the pay cut occurs after early retirement age, I don't see what qualification rule is violated here. There was no AMENDMENT reducing accrued benefits (per 411(d)(6)) and accruals are not decreasing on account of additional age and service.

I find this one a bit of a stretch . . .

[david rigby]

I agree with Harry O. I was in attendance at the EA Meeting session that discussed that Q&A. Quite a few in the audience just shook their heads at that interpretation. IRC 411(d)(6) explicitly focuses on paln amendments, yet IRS viewpoint seems to be otherwise.