FAE definition

[Guest blackacre]

A labor group is negotiating concessions with a company in bankruptcy. One proposal is to accept wage reductions and freezes in upcoming increases (the wage rates and scheduled increases are set out in the existing contract).

However, the hope is to maintain the existing accrual rate under the DB plan by using the present (unreduced) wage rate and scheduled increases for determining FAE in the benefit formula.

Can this be done? Can a plan define FAE as it wishes or must the earnings component accurately reflect reality and wages actually earned for any period?

Is this required under ERISA? Are there any bankruptcy concerns? PBGC limitations? Is preservation of benefit accrual an "improvement"?

Thanks for your thoughts.

[SoCalActuary]

The plan can use a special definition of compensation for benefit accrual. It is not a standard plan provision, so it is individually drafted. In addition, you would not have a 414(s) definition of compensation.

If no HCEs are involved, you won't care about 414(s), because you will pass the test.

For employees who have already established an average wage level, you can grandfather the existing average for use in future benefit accruals. In addition, you can establish future benefit accrual rates that increase yearly on the grandfathered wage if you want to improve benefits for the wages they would have received.

However, you should only do so if your recordkeeping and administrative systems can accommodate these special designs.

Meanwhile, actual compensation will still be used for 415 and 416 purposes.