Retirees Benefiting Under a COLA

[Guest merlin]

We've just taken over a plan where the Normal Retirement Benefit is subject to a 1% annual COLA. The only two retirees under the plan are the former owner and his wife. I don't have any history with respect to any other former employees.

The plan was frozen by amendment at 1/1/06. I'm assuming the freeze extended to the COLA as well as the accrual for active employees, but I don't know for sure. If the COLA was not frozen, what issues does that create with respect to 401a26, 410b, and 401a4?

[Guest Steve C]

The COLA is typically considered part of the accrued benefit (otherwise you'd be likely to run into backloading issues). As a result, I'd be surprised if the COLA had been frozen.

- Steve

[AndyH]

Good question and good answer, IMHO.

If the COLA was automatic then to stop it would seemingly be a cutback.

[Guest merlin]

OK, then the COLA stays in effect. They're benefiting so I have to test something, but I don't know what. Former employees are tested separately from the current actives. All current employees, including someone who terminates during the year, are excludable with respect to testing the formers. The ratio % test and the average benefits test don't apply to former employees, the test is fact and circumstances. So, if my only former employees are the two former owners, does that make the testing issue moot? When would I have a testing issue, if ever?

[AndyH]

I don't think they are benefitting. The COLA is part of the AB; there is no increase in the AB.

If for some reason you did have to test under 410(b), everbody benefits. Everybody gets a COLA based upon their AB at time of freeze.

[Guest merlin]

I like it. Thanks be to the pension gods for the smart people on these boards! And thanks be to the smart people themselves!