Amending NRA for New Regulations

[Guest AEA]

I have read and re-read the regulations and notice, but simply do not feel comfortable that I could have this easy of an out.

DB plan that does not allow for in-service distributions has an NRA of the earlier of age 65 or the attainment of a "Rule of 85" -- total years and service equal to 85. The employer DOES NOT want to give up the earlier retirement age, but is not confident it can make the "reasonable to the industry" argument (and not interested in paying for a letter ruling or determination letter). Is there any reason why we can't satisfy the new rules on NRA by simply amending the plan to have NRA at age 65 (or anything over the age of 62) and ERA governed by the rule of 85 with no reduction in benefit and/or the early retirement benefit simply be the present value of what the person would have received, as a lump sum, at 65 (the final NRA)?

This seems too easy....

[SoCalActuary]

Your common sense solution works for me also. Just remember that this removes the ability to take an in-service distribution between reaching 85 points and reaching age 62. So, notices, etc., are at issue here.

[Guest AEA]

The plan currently doesn't provide for in-service distributions, so that is not an issue. It does, however, have a reduced early retirement benefit at 55/10, which I will need to work around. Trying to decide if kosher to have two levels of early retirement benefits....

[Calavera]

What about late retirement actuarial increases? Those who reached 85 points and continue to work may receive greater of AE of Normal Retirement Benefit or Accrued Benefit. Does the actuarial increase need to be protected after NRA amendment?

[david rigby]

Any concerns about top-heavy acrruals?

[Guest AEA]

I am not sure about the top heavy issue and will run it by the actuary and/or TPA.

As for the late retirement question, the Plan quits counting service for benefit accrual purposes after 30 years. Further, no one is required to retire at either ERA or NRA and, if they don't and don't have 30 years of service, would continue accruing a benefit, I believe. Trying to decide if this helps with late retirement question....

Already tagged the issue about otherwise fully vesting at NRA.

Any other thoughts or suggestions?

[Effen]

AEA, I think you are missing Calavera's point about the actuarial increase. Assuming no changes, the NRA is earlier of 65 or satisification of Rule of 85. So, if a person is hired at age 25 and works every year until age 55, their NRA would be 55. If that person continues to work until age 65, are you actuarially increasing his benefit from age 55 to determine his benefit at age 65?

Now to your question, the rule of 85 is fairly common in "real" retirement plans, I hope the IRS won't give you any trouble. If they do, they will have boat loads of unions on their case.

You can only change NRA prospectively. Any benefit already accrued must still have the rule of 85 attached to it. You could change if for future accruals, but then you need to be careful with benefit calcs. You may be able to get around some of this if your plan allows you to give suspension notices instead of rollups, but then you need to make sure you issue the notices as soon as the participant has met the rule of 85.

[SoCalActuary]

Now to your question, the rule of 85 is fairly common in "real" retirement plans, I hope the IRS won't give you any trouble. If they do, they will have boat loads of unions on their case.

Real retirement plans - you mean to say that only large companies with HR departments and union pressures have real plans?

Smaller employers are not really planning for retirement; they just try to cheat on their taxes.

Just jabbing at you; your point about early & normal retirement adjustments is fine.

[Effen]

"you ain't cheat'n if it legal!" - Barry Bonds

(actually I lied about the Barry Bonds part)

[Andy the Actuary]

So, is bottom line as follows.

As of 12/31/2008, person age 45 with 20 YoS has now accrued Normal Retirement benefit of $1,000 month starting at age 65. If person works 10 more years, he would satisfy rule of 85 and would now have a NRA of 55. If the Plan provides, he could take an in-service distribution.

Now, it is 1/1/2009, and the Plan will be amended to change the NRA to 62 -- period. So, the person now has a $1,000 month pension at age 62 and has enjoyed a windfall because his NRA is three years earlier. Further, once the person reaches age 55 (and would satisfy the rule of 85), the person now has a benefit of $1,000/month actuarially increased from age 55 to 62 payable at age 62, or immediately (not actuarially increased all the way) if he terminates employment after age 55 and before age 62. The point is he can no longer take an in-service distribution prior to age 62. This is particularly nasty because of the uncertainty of what constitutes termination of employment for a sole proprietor.

This is one example and presumably this provision can be constructed without wearaway, with wearaway, or with extended wearaway and with/without windfalls?

Any thoughts?

[Calavera]

I have couple more sole-proprietor related questions.

1. Do we have to amend the NRA? Can we leave it at 55 and let the IRS review all relevant facts and circumstances to determine "whether the age is not earlier than the earliest age that is reasonably representative of the typical retirement age for the industry in which the covered workforce is employed" (how would you define it for a sole-proprietor?).

2. Let say, he didn't terminate his employment, but his benefits cannot be actuarially increased past age 55 due to the 3 year average compensation limitations and 10+ years of service. Would you say he has to terminate his DB plan when he is age 55, since he cannot start in-service distribution and his benefits cannot be increased?

[tymesup]

I have couple more sole-proprietor related questions.

1. Do we have to amend the NRA? Can we leave it at 55 and let the IRS review all relevant facts and circumstances to determine "whether the age is not earlier than the earliest age that is reasonably representative of the typical retirement age for the industry in which the covered workforce is employed" (how would you define it for a sole-proprietor?).

2. Let say, he didn't terminate his employment, but his benefits cannot be actuarially increased past age 55 due to the 3 year average compensation limitations and 10+ years of service. Would you say he has to terminate his DB plan when he is age 55, since he cannot start in-service distribution and his benefits cannot be increased?

1 - Do you want to leave your client at the tender mercies of the IRS? Get your ducks in a row now.

2 - He doesn't have to terminate at 55. However, you would be making a bad situation worse by not terminating, assuming there is no possibility of higher average compensation. If you're going for a determination letter, start the process early.

[Guest AEA]

Does it make any difference that the plan in question NEVER allowed in-service distributions? Instead there were "dual" NRAs - age 65 unless you met the Rule of 85 before age 65?

In reality, I think that they always meant this to be a form of early retirement but that is not how someone drafted the adoption agreement....