changing retirement age Notice 2007-69

[Guest mrsactuary]

SAW THIS ON ANOTHER DISCUSSION POST: I HAVE EXACTLY THE SAME ISSUE: MY PLAN HAS TO CONVERT TO AN AGE 62 RET FROM AGE 50 RETIREMENT,

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I believe that Notice 2007-69 states that The Sponsor has to adopt a good faith interim amendment to comply with 401(a) 1(b)(2) and (3) effective no later than the first day of the first plan year beginning after June 30, 2008 and the plan is operated in compliance with such amendment as of the amendment's effective date.

Applied to my case for Plan A (Plan A has a current ret age of age 50 and 1/1/ plan year), this means that we will have to amend the retirement age to be Age 62 (from Age 50), and the latest we can do this is January 1 2009 (effective Jan 1 2009).

So in the meanwhile till 1/1/2009 arrives, can the client just ignore the above Notice and continue contributing at higher contribution levels as per retirement age 50. This is assuming that the plan runs no risk of over-funding.

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[Andy the Actuary]

Yes. Since say for a calendar year plan, the amendment is not required to be effective until 1/1/2009, it may be ignored.

[AndyH]

Not directly on point, but related to the timing, wouldn't a 204(h) notice be required? I would think so.

[Belgarath]

I was wondering about that 204(h) notice issue myself. If required, that would make things pretty tight for, say, a 7-1-08 beginning of year plan.

[ak2ary]

Not sure about 204(h)

Don't see how the rate of benefit accrual is impacted. In the notice, it is clear that you have to protect all 411(d)(6) benefits other than the ability to take in-service distributions at age 50. I guess if the plan is a fractional rule plan and is going to accrue essntially the same benefit over a longer period of time< i see where 204(h) comes in

With respect to funding, how does NRA affect funding??? There is a revenue ruling that says you MUST ignore NRA for funding if it is an unreasonably low NRA. After the conversion, participants will still be able to retire at age 50 with the same benefit they had before, if you design the plan properly. So, if you could have NRA at 50 under the old plan you MUST be able to take early retirement at 50 now. And if it was reasonable to assume an age 50 retirement then, it is reasonable now. The fact that it is an early retiremnt age versus a normal retirement age is immaterial. Similarly, if it is now unreasonable to assume an age 50 retirement age, then it was unreasonable before and the fact that it was NRA is NO defense at all.

[AndyH]

I have a plan with a rank and file employee (among others) earning a benefit of x% of pay for life starting at age 57. If I change this so that the same benefit being earned is not payable until NRA is 62 how is that not a significant reduction in the rate of future benefit accrual?

p.s. This is an 8/1/08 -7/31 beaut. These designs are probably all former insurance plans so many will be off calendar.

[Everett Moreland]

At 1.411(d)-4 Q&A-12 is an example of how to increase normal retirement age without giving a 204(h) notice. This is also discussed in the preamble, 72 Federal Register 28604, 28605-06 (May 22, 2007).

[ak2ary]

The standard fix for this is not to give x% at 62, but rather the age 62 equivalent of an age 57 x% benefit at 62. That is not a redubction in the rate of benefit accrual. The conversion to a 62 NRA already will require you to increase the accrued benefit at 57 to its age 62 equivalent

[AndyH]

Good point. That approach makes sense.

[Dougsbpc]

What about a plan with a NRA of 57 and a normal retirement benefit of 100% of average comp? Suppose a participant has average comp of $5,000 so his projected benefit is $5,000 at 57. It will not be possible to provide an age 62 equivalent of what would be payable at age 57 as it would exceed 100% of average comp.

[ak2ary]

You could provide a 100% of pay benefit at 62, with an unreduced early retirement benefit at 57

[Dougsbpc]

Really? Would that fly?

I have heard a few people mention this.

So in the example of a $5,000 monthly benefit payable at 57, you would just change the NRA to 62 and continue funding for a $5,000 per month benefit payable at 57? I would think that if the participant took a lump sum at the early retirement age of 57, it would be the PV of his accrued benefit payable at age 62. The plan could then have excess assets if it were a small plan.

[ak2ary]

Assuming, in this case, that age 57 is a reasonable retirement age to assume for funding, you can assume the participant will retire and value the unreduced age 57 benefit. The benefit at age 57 cannot be less valuable than the presevt value of the age 62 benefit, but it can be more valuable. The only restriction is that the annuity payable at 57 cannot be greater than the annuity payable at NRA. Simply the plan would provide for an unreduced early retirement benefit at age 57. The plan would also provide that the lump sum is the greater of the PV of the normal and the PV of the early retirement benefit. If you were to fund for 100% of pay at 57 and the particicpant took it, you would avoid the excess asset problem. If he doesn't retire, however, you would, in theory; create an excess

[Dougsbpc]

ak2ary,

Thanks for the reply.

Most of the plans we have with < 62 NRA can be changed to 62 without too many problems. However, there are a few that may be able to really benefit from the unreduced early retirement benefit.

Question: Suppose (in this case) that the company owner / participant reached the early retirement age of 57 but still continued to work for a few more years. Would there be anything wrong with terminating the plan and paying the lump sum benefit when he reaches age 57? If this is possible it would likely solve the potential problem of excess assets.

We of course are not recommending plans with NRA < 62 anymore, but it sure would be nice to be able to allow the few who do have earlier NRA's to ride it out without having severe changes in funding.

[ak2ary]

That is his age 57 accrued benefit and thus what would be paid at termination.

From a policy perspective, the prohibition on early-normal retirement ages was to prevent the in-service distribution at an early NRA. In this case the plan termination is the distributable event, not the attainment of any age..thus the distribution would not violate letter or spirit of the law

[AndyH]

The standard fix for this is not to give x% at 62, but rather the age 62 equivalent of an age 57 x% benefit at 62. That is not a redubction in the rate of benefit accrual. The conversion to a 62 NRA already will require you to increase the accrued benefit at 57 to its age 62 equivalent

Back to this and the notice for a moment, wouldn't this change necessitate a 204(h) notice in a plan that is top heavy?

(Unless of course the top heavy minimum is increased proportionate to the NRA change, which doesn't make a lot of sense to me.)

[ak2ary]

It probably requires a 204(h) notice in a top heavy plan where the normal accrual is less than the TH min unless the employer wants to give away the farm