Impact of 415 increases to pension

[Gary]

A guy is over 70 and is still actively employed and receiving his RMD since he is a 5% owner.

His plan was frozen and at the time his AB was 100k, but the 415 $ limit limited his pension to 60k (due to short length of plan participation), the 415 comp limit is 100k too.

He is receivning an annual RMD.

When computing his pension does it seem reasonable to compute a gross benefit based on the 415 $ limit, increased for COLA and significantly increased for increasing age, thus allowing his gross benefit to approach the 100k AB. The gross benefit is then offset by the accumulated value of the prior year distribution.

In other words a couple of things are being addressed:

1) can a pension that has already commenced be increased if the 415 $ limit increses due to COLA?

2) can the 415 limit also be adjusted for age over 65 if the person has commened his RMD? If he commenced recieving his total AB then such a 415 limit adjustment would not be allowed, but in this case he is only receiving the RMD.

Thanks.

[Blinky the 3-eyed Fish]

While you have some document specific questions, I will try and answer anyway.

First, a frozen benefit can be increased with COLA increases if that is allowable by the document. A retiree's benefit can be increased with COLA adjustments too, although I wouldn't classify this guy's pension as "commencing" simply because he is receiving RMD's.

The 415 dollar limit should be increased with age no matter if COLA increases are applied or not in the document. Even in a frozen plan the 415 dollar limit is age applicable. An increase in age past NRA is not an increase in the value of the benefit per se, but rather a increase to account for a delay in receiving payment.

[AndyH]

I thought the plan need a real COLA provision (e.g. everybody gets a increase for CPI) for a frozen retiree to get the benefit of an increase in the 415 limit, no?

[Blinky the 3-eyed Fish]

Well, this goes to a document specific question and I gave the short answer. First, a frozen accrued benefit, if limited by 415 can be increased by the COLA increases if allowed by the document. This increase would only apply to benefits limited by 415.

I think this is fairly standard document language if you want to research LRM's and it certainly makes sense. If the plan is a safe harbor, the participant is merely recapturing benefits earned but otherwise previously limited by 415. If general tested and the testing did not cap at the 415 limit, the benefit recaptured was already tested and no additional testing is required. If the testing did cap at the 415, the COLA increase would require testing (and probably fail). So in any situation, the benefit is properly considered.

Any frozen plan would have required a change to the benefit formula and that would create a fresh-start date and a frozen accrued benefit. So, I certainly feel it is acceptable to just provide the COLA increase to the 415 limited benefit only.

BTW, I don't consider this person a retiree, although I don't think that necessarily matters.

[AndyH]

Well we hardly ever disagree, so I am reluctant to raise the question, but isn't this a question as to whether or not a benefit above 415 has been accrued? I have heard Jim Holland say over and over that the answer is no. And, I could be wrong, and I haven't researched this recently, but I have looked at this in the past and I did not arrive at your conclusion.

Maybe others could chime in.

[Blinky the 3-eyed Fish]

I can think of three things against the thought that the benefit is limited:

1) Why would (a)(4) reference testing with or without regard to 415 if you could never accrue more than 415?

2) Why would the document I just pulled out reference what I described in the last post?

3) How would you generate an amendment base under unit credit for a COLA increase if the benefit was limited to the prior 415?

I take it to be a yearly comparison of the plan benefit versus the limit in effect that year versus a static plan benefit.

[AndyH]

Never mind, maybe a compromise is the correct solution.

Sure, you can increase a non-terminated participant's benefit for whatever you wish, including 415 indexing. But i would submit that it is not a "frozen plan" and that testing is necessary for 401(a)(26), 410(b) and possibly 401(a)(4).

The situation that I described assumed a non-employee, which is not Gary's situation.