NRA Revisited

[Andy the Actuary]

Participant age 54 has average three year comp of $50,000 and there is no intention to increase this compensation. Plans NRA is age 55 and provides for in-service withdrawal. Person will have accrued $50K benefit by 1/1/2009. Person is not retiring and there are other participants so closing down plan is not attractive. Plan NRA will be increase to 62 in 2009 when participant reaches 55. The Plan will actuarially increase accrual rates in accordance with regulations.

Person will necessarily suffer a forfeiture because can't take an in-service distribution at 55 so will forego receiving payments from 55 to 62 and benefit at 62 will still be $50,000, so actuarial increase won't keep the person whole.

Have I read this situation correctly or is there some out I am missing?

[Effen]

Plans NRA is age 55 and provides for in-service withdrawal

If the plan provides in-service withdrwals, why not take it?

But, you are correct that as long as this person continues to work and defer payment, the value of the benefit will decrease.

[rcline46]

Since the value of the benefit cannot go down, how about making sure the doc allows a suspension of benefits, and under that item, the 'suspended' benefits get accumulated with interest and become an additional lump sum when the suspension is released.

[Blinky the 3-eyed Fish]

Since the value of the benefit cannot go down, how about making sure the doc allows a suspension of benefits, and under that item, the 'suspended' benefits get accumulated with interest and become an additional lump sum when the suspension is released.

How will this allow for him to receive a payout in excess of the 415 limit?

Andy, are you sure the age 55 NRA needs to be changed? After all the burden is to show it's not reasonable at age 55.

[Andy the Actuary]

Andy, are you sure the age 55 NRA needs to be changed? After all the burden is to show it's not reasonable at age 55.

I have considered the point you raised. The Plan covers a personality and much younger spouse. Income is attributable to substantial endorsements the personality's name generates. In the real life example (not my fictionalized version), the personality will be age 69, the spouse will be age 51 as of 1/1/2009. It is questionable when the spouse reaches age 55 that there will be a plan. It's quite possible the personality's royalties could ebb away if the personality pulled out of the limelight.

The regs essential state: "Section 1.401(a)-1(b)(2)(iii) of the 2007 regulations provides that, if a plan’s normal retirement age is between the ages of 55 and 62, the determination of 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 is based on all of the relevant facts and circumstances. The preamble to the regulations provides that it is generally expected that a good faith determination made by the employer (or, in the case of a multiemployer plan, made by the trustees) that the typical retirement age for the industry in which the covered workforce is employed is an age between age 55 and age 62 will be given deference, assuming that the determination is reasonable under the facts and circumstances."

The way I read the regulation, you get a wink at "55" but if called to the test would have to provide the typical retirement age evidence. Of course, the situation is unique and the actual retirement age is a function of a lot of outside events. Seems that "will be given deference" is not the same as a "gimme." If for some reason, the IRS wanted to hang the personality, this could be subject to attack and then I would be subject to attack.

[Andy the Actuary]

Plans NRA is age 55 and provides for in-service withdrawal

If the plan provides in-service withdrwals, why not take it?

But, you are correct that as long as this person continues to work and defer payment, the value of the benefit will decrease.

My understanding is you can't issue an in-service distribution if the person is under age 55 (i.e., under NRA)? Is there some exception I'm unaware of? If person turns 55 in 2009, then person will be under NRA (which will then be age 62) and cannot take an in-service distribution for the same reason??

[Effen]

OK, what am I missing? If NRA is currently 55 and the plan currently allows in-service distributions, how can you just change it to 62 and say the change applies to past accruals? Wouldn't that be a 411(d)(6) violation?

Any benefit he/she accrued prior to the change in NRD would still have a NRA of 55, so again, why not just pay the in-service distribution at 55 (in 2009)?

Is the concern that the IRS will challenge the 55 as unreasonable, especially considering that the person didn't actually retire? I guess they would be a little exposed on that one, but I don't see that waiting to take the money is going to lower the risk. Waiting will just create excess assets since the value of the benefit will decrease each year, while the assets (theoretically) increase.

[Andy the Actuary]

OK, what am I missing? If NRA is currently 55 and the plan currently allows in-service distributions, how can you just change it to 62 and say the change applies to past accruals? Wouldn't that be a 411(d)(6) violation?

Any benefit he/she accrued prior to the change in NRD would still have a NRA of 55, so again, why not just pay the in-service distribution at 55 (in 2009)?

Okay, we are in a thumb wrestling match. My understanding is the purpose of the new regs was to eliminate in-service distributions period before a "reasonable" normal retirement age. Value of benefits accrued would be preserved through actuarial increase. You're contending the plan would have dual normal retirement ages -- one for benefits accrued (age 55) and one for future accruals (age 62) and that the benefits accrued could be taken as an in-service distribution if the plan so provided. The example in the regs. supports the former position for certain and my confusion [i have never fully understood this discombobulation of words] in reading these regs is precluding me from seeing your position, which obviously is far more desirable than the total elimination of in-service distributions prior to normal retirement age.

Would appreciate hearing some other voices on this issue.

[Blinky the 3-eyed Fish]

Changing the NRA from 55 to 62 to under the guise that 55 is not reasonable is not a 411(d)(6) cutback. It just boils down to whether or not 55 is not reasonable. I am making that change when NRA is at least 55 for very few of my clients.

[Andy the Actuary]

Changing the NRA from 55 to 62 to under the guise that 55 is not reasonable is not a 411(d)(6) cutback. It just boils down to whether or not 55 is not reasonable. I am making that change when NRA is at least 55 for very few of my clients.

So is this what you are saying?

(1) For most of your clients, you're retaining age 55+ already in place.

(2) It is not a 411(d)(6) cutback if you increase the NRA to say 62 and don't allow in-service distributions where the plan once did at say age 55.

Finally, the question is if you increase NRA from 55 to 62, must the plan then prohibit in-service distributions prior to 62 in any amount? I believe this the point Mr. Effen and I were thumb wrestling over.