Arbitrary Acceleration of Early Retirement Age for Some

[Guest Grumpy456]

I have a large client (4000 plus employees) that will be terminating many employees over the next few years (the number of terminees and the period over which they are let go are unknown). The terminations will be involuntary. The client sponsors a DB plan. Virtually all of the terminated employees are participants in the DB plan. Some of the terminated employees are HCEs and some are NHCEs (the vast majority are NHCEs). Some, both HCEs and NHCEs, will be close to early retirement when they are let go. Early retirement under the plan is attainment of age 55 and completion of 15 years of service. The client would like, AT ITS DISCRETION, to be able to grant service to selected terminees so that they qualify for early retirement. For example, Bill and John, both NHCEs, are terminated at age 56 with 12 years of service. The client might want to grant Bill (but not John) an extra three years of service so that Bill is entitled to the plan's early retirement benefit when he is terminated. The client wants the ability to pick and choose who receives additional service credit on a case by case basis.

This proposed strategy just doesn't smell right to me, but I am having trouble putting my finger on the reason why.

I am somewhat familiar with the early retirement window rules which generally, as I understand them, are designed to provide incentives for eligible participants to elect EARLY retirement. This situation is different enough from my understanding of the early retirement window rules that I want to solicit ideas or opinions on such a practice.

I am most worried about the following aspects of this proposed practice:

1. The period over which the practice will exist is largely undefined (the "next few years" is about the best anyone can do); and

2. The arbitrariness of who is granted extra service (whether HCE or NHCE) seems unlikely to run afoul of the nondiscrimination rules (probably), but more to call into question whether the benefit is definitely determinable (although maybe not).

3. Since those eligible for early retirement are subject to distributions earlier than other participants, it also seems like the employer is picking and choosing who can get a distribution when in an arbitrary way.

Maybe I am trying to find a problem where there is none.

Thanks, in advance, for any ideas, comments or suggestions.

[Guest gerryg]

I think you are correct in having a problem. There seems to be a number of discrimination issues

[Guest Grumpy456]

Thanks, Gerry. In your view what are the discrimination issues? For example (and while not true), let's suppose that only NHCEs are affected. What specific nondiscrimination issues would be at issue? It doesn't seem to me that 410(b) or 401(a)(4) would be at play, but I still get the feeling that something isn't quite right--maybe the plan's benefit formula does not satisfy the definitely determinable standard?

If HCEs and NHCEs are affected (as will be the case if the plan sponsor goes forward), then is this a benefits rights and features issue? Would the plan be subject to the general nondiscrimination test now (i.e., would it fail to continue to satisfy its current plan design safe harbor)?

I need some help putting my finger on the specific problematic qualification issues so that I can go back to the plan sponsor with something more concrete than my feeling that something isn't quite right. Thanks so much.