Normal retirement age and accruals

[Gary]

My understanding is that 411 allows NRA to be 65 & 5 at the latest. And that that date applies to 100% vesting.

So for eg. a plan can choose a NRA at say 69 & 5, but would require 100% vesting at 65 & 5.

Say the NRB is 100% of compensation, subject to 415 and non discrimination in favor of HCE's

And say the accrued benefit is pro-rated on plan participation and say a person participates at age 54, and receives compensation of $75,000 every year in the plan. Then after one year according to the plan his accrued benefit would be 1/15 of $75,000 or $5,000 per year.

It would thus follow that at age 65 this person's accrued benefit would be 11/15 of $75,000 or $55,000. If this amount is 100% vested, its it an acceptable accrued benefit? i.e. is it also necessary that the full 100% of pay or $75,000 be accrued at 65?

Thanks.

[SoCalActuary]

You do not describe whether this is an NHCE or an owner. However, there are some points to consider:

A. You can have a formula of 100% of pay, reduced for less than 15 years of participating service. You can use 25 instead of 15 and you get a safe harbor plan design under 401a4. You did not indicate how you would handle non-discrimination issues.

B. If you have an owner who wishes to retire later than 65, you can make an actuarial assumption for funding purposes without using age 65. Remember to adjust for additional expected service and possibly for late retirement actuarial adjustment.

C. If the participant reaches age 65 and 5, they can elect to continue working and accrue additional service credits up to the maximum allowed in the plan.

D. If you are a non-ERISA church plan, you can set a different retirement age. These plans are exempt from 411.

I recommend you design your plan for what you want to accomplish, using these ideas. I do not believe you can get an FDL for age 69.

[Guest Harry O]

This is an acceptable plan design. A number of plans use social security normal retirement age as the plan's NRA but vest participants at age 65. These plans have unique 401(a)(4) issues but this is not an impermissible plan design.

[mbozek]

Under 411(a)(8) isnt an NRA after 65 only permitted for participants who have less than 5 yrs of service at 65?

[Gary]

Harry O's response makes sense to me and that was pretty much what I thought.

My understanding is that 411(a)(8) has to do with the requirement of 100% vesting or non-forfeitability, not necessarily plan design or accrual requirements.

[mbozek]

Where does 411(a)(8) say that? Under IRC 401(a)(14) the accrued benefits must be available no later than NRA. Under IRC 411(a)(7) the accrued benefit is determined as an annuity payable at NRA. How can you have an NRA at 69 for any participant with more than 5yrs of service at 65 when 411(a)(8) states that the NRA is the later of the time a participant attains age 65 or the 5th anniversary of the date participation commenced?

[AndyH]

I think you need to have "a" benefit payable at the earlier of plan NRA or 65+5P, not necessarily the "full" benefit.

I have a SS offset plan with NRA=SSRA, but benefits are 100% vested at 65&5P and early retirement benefits are payable at 65&5P. And it has been around forever and received several FDLs without incident. And the offset is calculated at age 65 (I'm not sure if that is required or not).

But I would gladly trade it for a safe harbor plan!

[SoCalActuary]

I did not hear any discussion of the non-discrimination safe harbor issues here.

If the plan sponsor has a plan design that provides the proper benefit at age 65 & 5,

complies with non-discrimination rules, and produces an affordable benefit at 65,

then the design meets all the qualification rules, including vesting.

Once that is done, the participant can choose to work longer.

If the actuary has a valid reason to assume the participant will retire late,

then the funding assumptions can reflect the later date.

Further, if the plan sponsor desires that the full benefit would be available at age 69,

after x years of service, then the plan can have a service reduction that matches it.

If the service reduction is less than 25 years, then you don't have safe harbor reliance

for certain types of plan design using fractional accrual rules, and you must manage

the discrimination rules accordingly.

[Gary]

To summarize what appears to be a legal plan design, not necessarily a desired or safe harbor design, allows for:

normal ret age of 69 is ok

plan must provide for 100% vested and payable at 65&5 if the employee desires, but the accrued benefit may be pro-rated since it is prior to normal ret under the plan.

For eg. if an employee is hired at age 60 and retires at age 65, it would be possible to have a normal ret benefit of $10,000, an accrued benefit of $5,556 (5/9 of normal ret benefit) that is 100% vested (and can be payable) even if the plan had 20% graded vesting schedule with full vesting after 7 years.

While the above may be unusual, is the concensus that it is legal?

Thanks.

[SoCalActuary]

Sorry - not quite. NRA is 65 & 5, and a benefit is payable at that point.

You can choose to fund for age 69, but not as a plan document feature.

The participant can choose to work to age 69, but is allowed to take the accrued benefit starting at age 65 if they retire.

[Gary]

Apparently others have worked with plans that use NRA = SSRA and that of course results in NRA beyond 65 & 5 so that is inconsistent with comments that NRA must be by 65 & 5.

Issue that I am driving at is can an accrued benefit be reduced for commencement at age 65? That is, prorated on a basis where the full accrued benefit is payable at an age above 65 (like 69)?

[AndyH]

I don't think that SoCal is correct on this point based upon other discussions on this Board in the past that convinced me otherwise. But I have not seen one with a NRA later than SSRA so I cannot be certain.

But Gary, there is no question that you can do as you indicate with SSRA=NRA and reduced benefits payable at 65 because I have one of these.

I suggest doing a search of this Board for NRA. I believe that MBG commented on the matter and I think that Mike Preston did as well. And I was in on at least one of those discussion because my understanding then was what SoCal's is now but I was convinced otherwise.

[AndyH]

Took a while to find this. Hope it helps.

http://benefitslink.com/boards/index.php?a...indpost&p=46667

[mbozek]

Given the language of 411(a)(8) I dont see how there can be an NRA later than 65 for any partcipant who has 5 years of participation at age 65. I dont see the relevance of the SSRA since its is not included in 411(a)(8) and is no longer used to define the max DB benefit payable under IRC 415(b). It is possible to continue accruals after age 65 and as noted fund a for benfit payable at a later date but that date cannot be the NRA. In the IBM case the court noted that under ERISA the NRA is 65.

[AndyH]

Clearly opinions differ on the matter and that is a valid one.

Like I said, I have never seen such an animal (NRA>SSRA or 65/5) personally but perhaps other have. Rereading the comments, I don't know what is correct.

[MGB]

I disagree with the opinions here. The phrase that has not been mentioned from 411(a)(8) is: "For purposes of this section..." and then it goes on to say to use the NRA from the plan if earlier. This certainly leaves open the possibility that the plan's NRA is later.

A plan can have any NRA, e.g., age 80 or even SSNRA. It is only when you try to apply the vesting rules and accrual rules of 411 that you need to incorporate the override of 65 & 5.

[mbozek]

MGB: Since the court in Cooper v. IBM 274 F Supp 1010 held that the NRA is age 65 I would appreciate any cite that holds otherwise along with a reference to IRC sections other than 411 for which an NRA after 65 would apply. Also the LRMs do not permit an NRA later than 65 for persons with more than 5 years of participation. Benefit commencement is required at 65.