Deferred Retiree Benefiting under 410(B)?

[AndyH]

Part time employee hits NRA but does not accrue because hours are below 1000 needed and average comp does not increase. Plan proides that late retirement calculation is greater of formula benefit or actuarial equivalent of prior year's accrued benefit.

The participant's accrued benefit increases on account of the actuarial increase for late retirement. Is this benefitting under 410(b)? Reg 1.410(b)-(3) does not seem to have anything that says no, but logically one might think the answer should be no. Opinions?

[SoCalActuary]

From another perspective, you should consider this:

Tha actuarial equivalent benefit is identical before and after the plan year.

In the prior year, the participant was eligible for a benefit at say 65 and a larger benefit at the next year (say 66). One year later, the benefit at age 66 is still the same. The only change is that the age benefits commence is not 65, but 66.

For evaluation and testing purposes, the benefit payable at 65 did not increase by retirement at age 66. For the same retirement age, 66 in the current year of testing, the benefit remained identical.

[AndyH]

Intuitively I agree with you; the value of the benefit did not increase, but the amount of the monthly entitlement, the check, did increase. Neither the reg or the code say anything about actuarial value of the accrued benefit; just the accrued benefit itself.

But I do appreciate the opinion.

(Took a sentence out that made little sense upon re-reading).

[Blinky the 3-eyed Fish]

I agree with SoCal. While the regs may be unclear, the principal is. As you know, a benefit has underlying factors, one being the age at which it is paid. If you change one factor, but don't change the value, there is no increase to be had. The check may have increased, but it would if the person wasn't at retirement age due to less of a discount from retirement. You can't treat them as benefiting.

[Guest smstls]

Because he has not accrued additional benefits, I agree that this person is not benefitting.

Wouldn't a somewhat similar situation be a cash balance participant who is only getting interest credits (because the plan is frozen or because the participant has terminated)? Although the benefit amount may increase with the passage of time, since there are no pay credits (i.e. accruals), I believe the participant would not be considered 'benefitting'.

[Guest merlin]

Two questions:

1. If he's not benefiting for 410b, he's not benefiting for 401a26. Does that mean a 1-participant db plan whose only participant is a deferred retiree would automatically fail 401a26?

2. The a4 regs allow you to disregard the actuarial increase under certain conditions, which seems to follow from Blinky's and SoCal's comments. If there's an increase to be disregarded, does that mean there really is an "increase", and he is benefiting, at least for testing purposes?

[Blinky the 3-eyed Fish]

1. They would pass on prior benefit structure.

2. No.

[AndyH]

merlin, I had the same reaction to #2, but I think I agree that the language is not quite right.

I'm not sure that #1 is not a problem unless the plan is underfunded.

[Blinky the 3-eyed Fish]

Even if the plan is not underfunded, the prior benefit structure is a sure pass if there is only the one participant in the plan and that participant has an accrued benefit. See 1.401(a)(26)-3.

[Guest merlin]

Andy, is 1.410(b)-3(a)(2)(iii)(F) the answer?

[Blinky the 3-eyed Fish]

Merlin, no, see 1.410(b)-3(a)(2)(iii). The person needed to have "satisfied all the applicable conditions for accruing a benefit". The cite you mentioned is in case the actuarial increase is greater than the benefit accrued. Andy's guy didn't work the 1,000 hours to accrue the benefit in the first place.