Early Ret Factors give rise to BFTS Rights Features?

[ak2ary]

A plan provides for early retirement at age 55 for all employees

The plan provides that early reduction factors are 1/15th for the first five years, 1/30th for the next five

The plan further provides that the benefit for Employee A, an HCE, is unreduced at 55

Clearly, this will impact A's most valuable accrual rate and I am not concerned about that, the general test is readily passed

One of the other actuaries in my office is arguing that the unreduced benefit is a Benefit Right or Feature subject to testing and automaticallyfails since only an HCE gets it

I disagree and believe that 1.401(a)(4)-4 is clear that using more than one actuarial assumption set for converting to other forms of benefits creates separate optional forms, but the amount of the benefit payable in the Normal form and corresponding QJSA are tested in the general test and not as BeRF's

Thoughts?

[ak2ary]

No takers?

[SoCalActuary]

I share your opinion. If the HCE was the only one allowed to take an annuity payment at 55, then BRF would be an issue.

Your issue is only about the amount of payment. This does affect the Most Valuable Benefit calculation for 401a4 testing, but I don't see it as a BRF issue.

[ak2ary]

Thanks

[AndyH]

I'll take the other side.

This is addressed in two places,

1. a(4)-(3) which defines the safe harbor or amounts testing criteria. It is a non-uniform subsidy which makes it a non-safe harbor and creates the need for numerical general testing.

2. In addition, it is a b/r/f under -(4) (e)(1)(i) (as you acknowledged).

1.401(a)(4)-4 (a) says in part:

"...BRF's are made available to employees in a nondiscriminatory manner only if each brf satisfies [current and effective availability]"

I submit that there are two separate requirements and you have met only one.

[ak2ary]

Excellent..I knew someone would take the other side...

Especially since, as i read my post, I realized that it could be interpreted that I was treating the two sets of ERFs as separate BRFs....but I wasn't. I don't believe it to be a separate BRF from the other early retirement provision. The early retirement benefitis payable on exactly the same terms to all employees. It is payable in the same optional forms, those optional forms use the same actuarial assumptions for conversion from the normal form for this employee as for everyone else.

The only difference is in the determination of the amount of benefit, which I believe is allowable under

1.401(a)(4)-4(e)(1)(ii)...whatcha think?

[ak2ary]

So, in essence, I agree that if they are separate BRFs they must be currently and effectively available to a nondiscriminatory classification of employees...I just don't see them as separate BRFs..I see them as a single BRF with different amounts

[AndyH]

(e)(1)(i) "The term optional form of benefit means a distribution alternative ...or a distribution alternative that is an early retirement benefit or retirement-type subsidy described in section 411(d)(6)(B)(i)..."

An early retirement reduction 1/15, 1/30 benefit either is or is not a subsidy for these purposes. If not, then there is only one subsidy and therefore the HCE has his own optional form of benefit.

If the 1/15, 1/30 is considered a subsidy then there are two different subsidies, therefore two different optional forms of benefit, IMHO.

I don't see where anything in (e)(1)(ii) changes that.

I presume this is academic, since a QSERP type provision could accomplish the same thing without going through BRF, right?

[SoCalActuary]

AndyH, can you explain how a QSERP is not a separate BRF? If it is in the plan, how is it not separate?

If it is not in the plan, it won't pass 401a26. If it is a non-qualified benefit, you have other issues, including

the possibility that the plan sponsor can't have one.

[AndyH]

The benefit is the sum of (a) what the benefit was and (b), the amount, if any, from Appendix A, which list one social security number (or job classification) and amount.

No mention of when it is collected. Same amount at whatever age chosen. Therefore not an early retirement subsidy.

Or instead gross up the amount and make it subject to the normal early retirement reduction. Actually that is better.

[ak2ary]

If you provide the same benefit at whatever age is chosen, it is an early retirement subsidy and, in your opinion, is a BRF subject to testing. Since it gives a different early retirement reduction than is applied to everyone else, it would fail that analysis.

If it is available only at ERA, it is a window subject to tresting...

If your analysis is correct, the only possible way to fix is via a gross up of the NRB

[AndyH]

Agreed.

[Guest Harry O]

I think this is an obvious BRF problem. QSERPS provide different AMOUNTS of benefits to HCEs which is permissible if you can hide the additional benefits in the general test. This plan provision is basically a separate early retirement subsidy for one employee. Looks like a BRF problem. Just my two cents . . .