NRA with "age 55 and completion of 16 years of service"

[himt4]

Plan has formula: 6.66% times Years Of Service up to 15. Benefit is accrued using fractional rule with maximum denominator of 20. NRA is 65&5, or if earlier, “55 and completion of 16 Years of Service”. Year of Service requires 1000 hours. Document describes denominator of Accrued Benefit fraction as “Years of Service the participant would accumulate if employment continued until NRA”

A full-time employee, born 1/1/51, is hired 1/1/90 and is still employed on 1/1/05. The numerator of his Accrued Benefit fraction is 15 as of 1/1/05, but what is the denominator of his Accrued Benefit fraction as of 1/1/05?

[AndyH]

Why would it be other than 15? What a weird plan. Normally the 55 & 15 would be an ERD not a NRD, which would of course change my answer.

[Blinky the 3-eyed Fish]

15 or 16 Andy? If 55/16 is indeed the NRA, then he would have 16 years at NRA. This of course is not a safe harbor design.

[SoCalActuary]

This design has an unsafe-harbor benefit formula, subject to the 70% avg benefit test.

However, it also does not have a uniform retirement age.

For the denominator, I interpret it at 16, since that was the projected retirement age.

At worst it would have been 20.

[AndyH]

Yeah, sorry, 16 of course. Time for new eyes.

[himt4]

Ok, so then at 1/1/05, he has accrued a fraction of (15/16) of his benefit.

Now if he quits on 1/2/05, he obviously has less than 1000 hours in 2005, and has therefore only completed 15 Years of Service, and hence has not met the criteria for the “55 & completed 16 Years of Service”, so his NRA age is 65&5 which puts it at 1/1/16. So for the denominator the “Years of Service the participant would accumulate if employment continued until NRA” would be 26, capped at maximum of 20. So his accrued benefit fraction at 1/2/05 would be (15/20) which would make his accrued benefit less than it was at 1/1/05 (15/16).

So perhaps we should employ this same logic at 1/1/05, and say that the first step is to calculate his NRA. Even though he is still working, as of 1/1/05 he has only completed 15 years and is not yet eligible for the 55&16 criteria which makes his NRA 1/1/16. So his fraction at 1/1/05 would be (15/20).

What do you think about that interpretation?

[Guest Ron Sevcik]

My opinion is that his NRA is still 55 and 16 even though he has terminated with less than the 16 years of service. If you say he doesn't qualify because he terminated with less than 16 years, what do you do with the employee who terminates with only 4 years (assume it is a top heavy plan and he is 60% vested)? He never reaches NRA of 65 and 5. I have always operated under the assumption that future service is counted when determining NRA. Now if this were an early retirement provision, then he would not qualify until he has the 16 years if service.

[Gary]

It does seem like a good approach to use the age 65 & 5 normal retirement age in the calculation of the accrued benefit until the participant has the 16 years of service.

Of course the 5 in "65 & 5" means the 5th anniversary of his participation date at the latest, I presume, thus the reason why it isn't an issue if an employee leaves with a a vested benefit and less than five years of service.