Service Crediting Provision as Protected Benefit?

[BTG]

We have a client with a strange provision in its plan that credits participants with an extra year of service for each five years of actual service they complete. Is this a protected benefit under Code Section 411?

Technically, the "extra year" doesn't accrue until the participant has completed each 5 year segment, but from a practical standpoint it seems pretty harsh to yank this benefit from someone with 4 years and 6 months of service. Any thoughts?

[Blinky the 3-eyed Fish]

Harsh? Maybe. But if the document doesn't give the extra year until the 5 years are up, then it's not accrued until the 5 years are up. Equate it to a last day requirement in a DC plan if you like.

[Mike Preston]

What the Fish said. Under IRC. However, there may be a different result under ERISA. The fact is that we just don't know. Yes, yes. I know. The IRS has jurisdiction over all things "accrual." Nonetheless, if a participant wanted to claim this was protected, I doubt there is a court in the land that would consider it a silly lawsuit. Sometimes the "correct" course of action isn't the one that is legally defensible at a cost. Instead, it is the action that ensures one needn't defend anything - legally defensible or not.

[SoCalActuary]

This sounds like a 20% backloaded benefit formula. It can be changed by amendment, just like any other benefit formula. If it results in lower benefits for an individual in the future, then 204(h) kicks in with the amendment.

Plans that use 5 year elapsed time formulas don't have to give extra benefits at 4 yrs + 1000 hours, or even 4 years, 11 months and 20+ days, because that is not the terms of the plan.

You did not explain the purpose of the question. Are you planning to amend the formula, or do you have an existing participant looking to score the extra benefit before 5 years? Are you considering a freeze or termination of the plan?