Calculation of Top Heavy Minimum For A deferred Retiree

[Guest merlin]

Our software (Relius) is calculating the t/h minimum for a deferred retiree (NRA=65, current age =68) as follows:

2%x (avg. comp x YOS) to age 68, then increasing that amount actuarially from 65 to 68. Relius says this is the IRS position, per 1.416-1, Q&A M-3. How does M-3 give this double dip, rather than the usual "greater of actuarial increase or recomputed benefit"?

[Mike Preston]

I think Relius is correct. That is the way the minimum works when somebody is beyond the NRA defined in the plan.

[david rigby]

Not my understanding. Can you explain?

[Mike Preston]

One of the hallmarks of the 2% TH minimum is that it has always been defined as the accrual "at normal retirement age". If a plan has a retirement age of 55, then a participant in such a plan has a 2% entitlement at age 55 for each year of TH service. If the benefit was payable at an earlier age than normal retirement age, the minimum they were entitled to would be the actuarial equivalent of that 2% payable at normal retirement age (in the form of a single life annuity).

The Q&A cited has merely stated that the same relationship holds true with respect to an individual that retires from the plan after normal retirement age. That is, they get the actuarial equivalent of a 2% single life annuity payable at normal retirement age. If they are 5 years beyond normal retirement age when they enjoy a TH accrual, then the amount they are entitled to is the actuarial equivalent of 2% of pay as a single life annuity payable at their normal retirement age.

I don't see that as double-dipping, although others might.

Yes, the TH minimum when calculated as a percentage of pay for that last year of service is significantly higher than 2% of pay.

[MGB]

Although I never noticed that rule before, now that I've read M-3, I agree with Relius' methodology.

[Guest tcv]

I don't read M-3 as requiring this. I would give the greater of the benefit at NRD actuarially increased to 68 or the actual formula using service & comp. to 68.

[Guest tcv]

Reading M-3 yet again, I understand the interpretation being given by Relius and Preston. I'm not necessarily convinced that it is correct since it gives a greater accrual than what I believe the law requires. But I do understand how they say the greater benefit is what M-3 says.

[Blinky the 3-eyed Fish]

I am curious if this has been addressed in a previous Gray Book or IRS Q&A.

[david rigby]

I found nothing in the Gray Book.

[AndyH]

Add me to the list of people who have never heard of this before and have been in the business before TEFRA.

[Mike Preston]

I found nothing in the IRS Q&A's at the ASPA Annual Conferences going back to 1999. That is as far back as I go electronically.