Changing Normal Retirement Date

[Guest ksumner]

We have plans written that Normal Retirement Date is anniversary date nearest attainment of Normal Retirement Age.

If NRA is 65 and plan is calendar year, a person born prior to 6/30 will have a NRD of 64 years and x months.

We would like to change NRD to first of month coinciding with or next following attainment of NRA.

Will this be a cutback that is not permissable?

[KJohnson]

I would think that you would have a problem. Certain "deminimis changes" are allowed in the timing of distributions for an optional form of benefit but you are only allowed to vary by two months or less. 1.411(d)-4(B)(2)(ix).

Also, I have never looked into this, but since you are fully vested at NRA, would this be considered a change in the vesting schedule?

[Larry M]

It is possible to amend the plan to change the normal retirement date to be something other than the anniversary nearest, following or preceding the nra. Any benefits earned prior to the date of change would be "protected", but the effect upon the plan should be negligible and it will be a rare situation where the actual beneits payable will differ.

[Most people feel their 65th birthday (or other such date)is the day they want to kick back and retire. Why limit the reitrement plan to an artificial day such as the first day of the month or the first day of the year coinciding with or following the birthday? my preference is to have the normal retirement date the same as the normal retirement age. There is no need to have an individual wait one-half month or one-half year to get her/his retirement benefits. The concept of using an anniversary date arose when many of these plans were funded by insurance policies and they "matured" on the policy anniversary which coincided with the plan anniversary. Now that most sponsors (through their consultants)recognize the foolishness of having insurance in a qualified plan (yes, there are exceptions), there is no need to limit the retirement date. ]

[Dowist]

The normal retirement date is the date when benefits fully accrue. The normal retirement age is the date when benefits must be fully vested (regardless of years of service).

The accrual of benefits may be determined in part by the NRD - for example, (and this assumes a certain type of plan) if your NRA is June 15, 2009, so that your NRD is January 1, 2009 and as of January 1, 1999 you had 10 years of service, your accrual fraction (using the fractional method) would be 1/2. This fraction would be applied to the plan's benefit formula and your particular data (compensation), and this would result in your accrued benefit payable at NRD as of January 1, 1999.

Now if you were to change the NRD so it was the actual NRA, the fraction above could change - instead of it being 1/2 as of Jan. 1, 1999, it might be slightly less.

Because of the anticutback rules, you'd have to protect the benefit as of the date of change. (Note that this might result in the now famous "wearaway" situation in which the participant's benefit accrual is briefly suspended.)

Also, you should probably give the 204(h) notice as there is the possibility for some participants (as in the example) that there will be a reduction in the rate of benefit accrual.

Because you're not changing the NRA, you would not have a vesting issue. If you had a situation in which the NRA was increased, you would have to follow the rules that apply to a change in vesting schedules.

By the way it probably is easier to calculate an accrued benefit when the NRD is the first day of the year or at least the first day of the month.

[david rigby]

I don't agree with Larry M that it is easy and practical to define NRD and NRA. It is just the opposite, at least in a DB plan which pays benefits monthly.

The first paragraph of Dowist's reply is the correct summary of NRA and NRD.

I suggest a practical handling of this proposed plan change: change the NRD only for those commence participation after the change is adopted. We have changed NRD in many DB plans from 65, to "65 and fifth anniversary", where it applies to new participants.