How do you fix a 411(b) violation

[Guest jdw]

I was just retained to review a DB plan that has an unusual benefit accrual. The normal retirement benefit equals service times $xx/month (currently $25). However, if a participant retires on/after NRD, the NRB is the accrued benefit plus $5.60/month multiplied by years of service before 1980. A particpant retiring in 2003 with 8 years of pre-80 service accrues a benefit of $25 plus 8*5.60=69.80, well above the 411(b) limits.

Plan has had this provision for at least two decades, and has several determination letters. New actuary for plan agrees it violates 411(b).

Any good fix ideas?

[david rigby]

From your phrasing, I assume the plan does not use the fractional rule of 411(b)(1)©.

Compliance with 411 is a requirement for qualification. If not compliant, not qualified. I think you have to fix the root problem. Plan's ERISA counsel should be consulted.

[Mike Preston]

However, if you have a current letter of determination, the plan should be eligible for 7805(b) protection. I would amend the plan to provide for a benefit that, going forward, does not violate 411, grandfather the existing benefits and submit for a new DL highlighting the issue.

[MGB]

I am not clear by what you said that there is a problem.

What does the person get if they retire at 65? Are you saying the pre-80 extra accrual pops up at that time? If that is the case, I agree there is a problem.

However, your example is talking about an "accrual" that includes $25, which implies another year of service. If this accrual only happens after age 65, then you don't have a problem because it is less than the actuarial increase on 31 years of service x 25 = 775.

[Mike Preston]

I agree with MGB that if you don't have a 411 violation, you don't need 7805(b) relief!

[Guest jdw]

MGB, you are correct -- the benefit pops up at age 62, which is normal retirement age in this plan. If you retire at the end of the year you attain 62, you accrue the normal $25/month for that year PLUS the $5.60/month times pre-80 service.

Because of the "pop up" effect, I do not think it satisfies fractional accrual rule either, since the pre-NRA benefit amount is much less than the benefit on NRA. I had thought of making a VCP application and amending it out of the plan prospectively, since they have 7805 relief. The mostly union work force will really appreciate me for this.

[david rigby]

I believe any accrual pattern can be used if you wrap the whole thing in the fractional rule.

[Guest Harry O]

I don't see how using the fractional rule solves your problem. The plan only provides the $5.60 per month add-on for pre-1980 service if you work until NRD. Using the fractional rule would result in giving a portion of this benefit to all participants with pre-1980 service regardless of when they terminate (because the fractional rule essentially prorates the benefit the employee would have earned if he had worked to age 65).

I've seen similar formulas but the $5.60 add-on is usually called a "medicare supplement" or something similar. The theory is that these payments are not subject to the accrual rules because they are medical rather than pension benefits. Unfortunately, this doesn't technically fly since DB plans can only provide retiree medical benefits through a 401(h) account. But medicare supplements have received IRS determination letters for years.

[MGB]

I do not think there is a problem at all. You are talking purely about a post-NRA adjustment to the benefit. As long as the increase in benefit payable is less than the actuarial increase on the benefit at NRA, then where is the problem? You are allowed to give the actuarial increase, or, if you give less, provide them with a benefit suspension notice. This seems like it will always be less than the actuarial increase (because people have so many years of service in order for this to happen).

I don't think you have a problem at all.

[Guest Harry O]

Lets make sure we all agree on the plan formula. I thought the benefit was $25 a month per year of service PLUS if you retire on or after NRA $5.60 per month per year of pre-1980 service. If I have 30 years of service, 10 years before 1980, and retire at 64 years and 11 months of age, I get $750 per month. If I work one more month and retire right at age 65, I get $750 per month plus $56.90 per month for a total of $806.90.

So . . . I accrued an additional benefit of $25 per month at age 64 and now in the year of retirement when I attain age 65 I accrue an additional benefit of $81.90 per month ($25 + ($5.60 x 10 y/s before 1980)). This is more than 133% of my rate of accrual in the prior year ($25 x 1.33 = $33.25).

I think there is a problem in the year the employee reaches age 65. Forget about what happens after age 65 . . .