Part-time work reducing Accrued Benefit

[Guest AEA]

I feel like there should be a Code section or Treas regulation prohibiting this....

Plan determines accrued benefit based on Average Compensation, which is the highest 60 months of compensation out of the last 120 months. Participant was a full-time employee who dropped to part-time employment when moved out of state in 2003 (works from home, coming into office once every few months for a few days). Because of the double pro-ration issue, the Plan credits the participant for full years of service, even though she does not have the required 2,000 hours, but uses actual plan year compensation. As of June, the participant's part-time years will outnumber her full-time years during the last 120 months. Since she earns less as a part-time employee, her Accrued Benefit will begin going down from where it was when she worked full-time (because of her lower average compensation, even though her years of service have continued to increase). There has been no plan amendment and the employer did not force her to continue working on a part-time basis -- her choice. However, is the higher level of Accrued Benefit that she "earned" when she had full-time employment (and a higher salary) protected? Must the Plan pay her at least the amount she would have paid if she had quit while still employed full-time? If yes, what is the legal basis for this? I have looked all over Code section 411....

One suggestion made for the Plan is to amend the months counted from the last 120 months to the last 180 months or more.

[Andy the Actuary]

See 411(b)(1)(G). Also, depending upon her age and the plan, IRS Reg. 411(a)-7© provides that the normal retirement benefit cannot be less than the greatest early retirement benefit.

Hope this helps

[david rigby]

As I understand the original question, that code section does not apply.

Although IRS may disagree, I see nothing in IRC that would prohibit an accrued benefit to decrease solely because a person's compensation (in this case, average compensation) goes down.

However, just as important is careful reading of the plan document. In particular, the original Q mentions PT and FT, concepts which are not usually defined (or relevant) in most qualified plan documents. For example, if EE works 1200 hours, gets another year of service, perhaps the plan definition will include that pay in determination of average, but if the EE works 800 hours, then such year is excluded.

[AndyH]

IRS people have cited 411(b)(1)(G) as being applicable here and prohibiting a decrease in the accrued benefit. Some (obviously) disagree. It seems applicable and sensible and safe to me.

[Guest AEA]

Thank you!