Septuagenerian new hire

[Guest Etseq]

How would you all handle an employee who begins service after age 70 1/2? Does 401(a)(9)©(iii) require us to actuarially adjust back to a period when he wasn't even working, and thus not accruing benefits?

[SoCalActuary]

Treat the person normally in handling entry, benefit accrual, vesting, and all other aspects. Once the person has separated from service, most plans specify a benefit starting date. But this person is still working.

If your plan requires distribution to this person, either they are a 5+% owner, or your document has specific language that they cannot defer payment. This is the first condition to receive payment, and frankly I don't like to design plans that require inservice distributions for non-owners.

However, you are only obligated to pay the vested benefit. If you fully vest on an age condition, without a service condition, then the participant meets the second condition to receive payment. Frankly, I don't like to have vesting without some service condition as a minimum.

The adjustment for late retirement is less than the continued accrual of benefits for at least the first 7 years of most plans with uniform accruals. So the person who continues to get credits will get the greater of the plan formula or the actuarial equivalent increase of the prior year benefit. I prefer the "ratcheted actuarial increase" as the proper measure of the benefit, where the actuarial increase is on the prior year's accrued benefit, without going back to years before the prior year, since those previous years already complied.