Linkage to DB plan

[Guest Mlehman]

Employer has an excess DB plan for compensation above limits. Excess DB plan has a normal retirement age of 65, however offers early retirement at 55 with 10 years of service. It seems that this will no longer be allowable due to 409A no acceleration, however I have not seen this example.

If employer changes normal retirement age to 55 with 10 years of service otherwise age 65, does this change present any problems?

[Guest Harry O]

Why do you think this plan design doesn't work?

[Guest Mlehman]

Why do you think this plan design doesn't work?

Age 65 is the current Normal Retirement Age, the employee has an option to commence payment as early as age 55, but can select any age up to 65. Isn't this an acceleration of payments and therefore not allowed.

The alternative plan design (changing Normal Retirement Age to 55 with 10 years of service, otherwise age 65) appears to work, but I was looking for some alternative viewpoints.

[jpod]

If the employee must separate from service to get early retirement benefits (and if there is a 6-month suspension if the "specified employee" rules apply), the availability of early retirement benefits in and of themselves is not a problem under 409A.

[Guest Mlehman]

Are you basing this on section 409A-3(j)(1) Prohibition on acceleration of payments?

"For purposes of this paragraph (j), an impermissable acceleration does not occur if payment is made in accordance with plan provisions or an election as to the time and form of payment in effect at the time of initial deferral...."

If so, then the conclusion could be that the current plan provisions allow the participant to wait until 65 to commence their DB excess plan benefit or commence as early as age 55, and the acceleration of this payment for an early retirement benefit does not run afoul of 409A.

If not, then can you point me in the right direction?

[Locust]

The excess plan will have to meet the 409A payment rules, which means that the covered employee won't be able to elect a payment date after the compensation is earned. Under the excess plan he will have to choose payment on a date allowed by the rules, such as separation from service, or attainment of age 65, and the election has to be made before the compensation is earned.

It can't work like the qualified plan where the employee has an election to be paid when he terminates or later (until 65). However, the excess plan will not have to meet the qualified rules, such as restrictions on payment before termination of service or the minimum distribution rules.

[Guest jmbauer]

It can't work like the qualified plan where the employee has an election to be paid when he terminates or later (until 65). However, the excess plan will not have to meet the qualified rules, such as restrictions on payment before termination of service or the minimum distribution rules.

That is my understanding, too - separation at 55/10 appears to be a valid payment trigger, but the distribution cannot be discretionary as it is under the QP (and even if it could be discretionary, I believe there would be a constructive receipt issue).

Mandatory commencement of the excess plan benefit at an early retirement age may be good for security reasons, but could also be undesirable depending on the actuarial reduction.