Double Proration

[Guest pdxactuary]

DOL reg 29CRF 2530.204-2(d) prohibits double proration of defined benefit plan benefit accruals. I recently became the actuary for a plan that I believe has double proration issues in two places as follows:

• Part-time employees for employees in the pension equity plan. When a participant works less than 2,000 hours, they get a prorated PEP accrual. For example, if they work 1,000 hours, and the PEP accrual % for their age + service would be 5% if they were full time employees, they will actually receive a 2.5% PEP accrual (5% x 1,000/2,000). The compensation that is counted towards their Final Average Pay is their part-time pay, (i.e. we are only counting pay actually received, and not pay as if they were a full-time employee). I believe this clearly is a double proration of benefit accruals.

• This plan also allows for seasonal employees for the participants whom did not elect the PEP plan. These participants are covered by a traditional FAP plan. The issue is less clear for these participants, but I think the double proration exists. The seasonal employees typically work 9 months of the year, thereby earning 9/12 of a year of service as they earn a month of service for every month in which they have an hour of service. The seasonal employees seem to work full-time hours while employed. Final Average Pay is defined as “the average of the Participant’s Compensation over the consecutive 36 month period...”. For seasonal employees, I read this as looking at a 36 month period, and taking the average, rather than piecing together 36 months when they were actually receiving pay and then taking the average. For an example I have put together this hypothetical seasonal participant:

Year Compensation Months worked

2004 $40,000 8

2003 $36,000 10

2002 $35,000 9

2001 $34,000 9

Method 1: Final Average Pay is the average of 2004, 2003 and 2002 pay, even though he only worked 27 months: (40,000 + 36,000 + 35,000)/36 = $3,083.33. This is the method I believe the current wording of the plan requires, and seems to be the method used in prior benefit estimations.

Method 2: Final Average Pay is the average over all four years, as the total months worked add up to 36 months: (40,000+36,000+35,000+34,000)/36 = $4,027.78.

I believe that Method 2 must be used to avoid double proration.

The reason for my post is that I am getting push back from the attorney who drafted the plan as they were not aware of this issue. I believe that double proration exists in the in the first instance, and probably in the second. Any opionions? Thanks!

[david rigby]

First bullet. I agree.

Second bullet. I think so. Perhaps I'm so stupid that I just need more information. How about an example?

BTW, what do you mean by "push back from the attorney"? Is the attorney blaming the messenger (you) for drawing attention to a plan provision that may conflict with the regs.?