Can a benefit "flip" from accrued to ancillary?

[Übernerd]

Company wants to amend the disability pension provisions of its DB plan so that the annuity starting date is the date of the disability determination (i.e., the benefit would not be a disability auxilary benefit and there would be a retractive annuity starting date with an election, spousal consent, etc.), unless and until the participant recovers and returns to employment, in which case the participant gets credited service for the period of disability and there is no offset (i.e., the benefit becomes an ancillary benefit in addition to the accrued benefit).

Can a benefit "flip" this way, from being a payment of the accrued benefit to being ancillary?

[david rigby]

I'm confused (OK, perhaps that is common).

Are you saying a benefit that is triggered by a disability is not an ancillary?

[Übernerd]

I'm confused (OK, perhaps that is common).

Are you saying a benefit that is triggered by a disability is not an ancillary?

Yes, that's possible. If the disability pension doesn't reduce the accrued benefit payable at normal retirement age, it's ancillary. If it does (i.e., if it's an immediate payment of the accrued benefit), then it's not ancillary. If it's not ancillary, the annuity starting date is the date of disability, there's no more QPSA coverage, and no election at NRA. If it's ancillary, there's still QPSA coverage, and the participant gets an election at NRA.

[GBurns]

You seem to mixing the disability payment into the pension/retirement benefit.

As a result I am not sure what you are asking.

As far as I recall, a disability payment is either a separate benefit (ancillary) or it has a pension offset. The pension benefit is always accrued, but I do not recall seeing an accrued disability benefit.

[tymesup]

One thing you do not want to do is put a disability benefit (60% of pay, for instance) inside a defined benefit plan. It creates an immediate accrued benefit of 60% of pay (although 415 might limit some of the damage).

A guy I knew had a friend who overheard a couple of guys talking about a fellow who remembered someone who did this.

[david rigby]

One thing you do not want to do is put a disability benefit (60% of pay, for instance) inside a defined benefit plan. It creates an immediate accrued benefit of 60% of pay (although 415 might limit some of the damage).

Not sure what this means. I thought IRS Reg. 1.411(d)-4 provides that a disability benefit is not protected, and can be eliminated via plan amendment. See part (d) of Q&A1.

[tymesup]

It was a while ago that this came up, so I'm a bit hazy on the details.

IIRC, if the disability benefit is the accrued benefit payable immediately, with or without actuarial reduction, with or without immediate vesting, it's an ancillary benefit and not protected. By paying an immediate 60% of pay, on the other hand, which has otherwise not yet been accrued, the plan has created a 60% accrued benefit. It's not clear to me why a death benefit of 100x is OK, but this is not.

A plan and consultant tried this. The sponsor liked the notion of self-insuring the disability benefit, but wanted stop-loss insurance in case things got out of hand. The consultant was getting puzzled looks from insurance companies that had never seen this arrangement before. The second lawyer who looked at this said the accrued benefit issue was the problem. The first lawyer who OK'd the design went to the end of the bench and was let go in the off-season.

[Übernerd]

You seem to mixing the disability payment into the pension/retirement benefit.

As a result I am not sure what you are asking.

As far as I recall, a disability payment is either a separate benefit (ancillary) or it has a pension offset. The pension benefit is always accrued, but I do not recall seeing an accrued disability benefit.

Sorry for the delay in responding. I can't get our spam filter to stop killing the notifications.

It's certainly possible that I'm missing something, and I agree that the disability benefit and the accrued benefit seem to be mixed up here. I'm talking about the difference between a "disability auxiliary benefit" and an immediate payment of the accrued benefit on account of disability. Here's a snip from Reg § 1.401(a)-20, Q&A 10 on the distinction:

© Disability auxiliary benefit —(1) General rule. The annuity starting date for a disability benefit is the first day of the first period for which the benefit becomes payable unless the disability benefit is an auxiliary benefit. The payment of any auxiliary disability benefits is disregarded in determining the annuity starting date. A disability benefit is an auxiliary benefit if upon attainment of early or normal retirement age, a participant receives a benefit that satisfies the accrual and vesting rules of section 411 without taking into account the disability benefit payments up to that date.

Example. (i) Assume that participant A at age 45 is entitled to a vested accrued benefit of $100 per month commencing at age 65 in the form of a joint and survivor annuity under Plan X. If prior to age 65 A receives a disability benefit under Plan X and the payment of such benefit does not reduce the amount of A's retirement benefit of $100 per month commencing at age 65, any disability benefit payments made to A between ages 45 and 65 are auxiliary benefits. Thus, A's annuity starting date does not occur until A attains age 65. A's surviving spouse B would be entitled to receive a QPSA if A died before age 65. B would be entitled to receive the survivor portion of a QJSA (unless waived) if A died after age 65. The QPSA payable to B upon A's death prior to age 65 would be computed by reference to the QJSA that would have been payable to A and B had A survived to age 65.

(ii) If in the above example A's benefit payable at age 65 is reduced to $99 per month because a disability benefit is provided to A prior to age 65, the disability benefit would not be an auxiliary benefit. The benefit of $99 per month payable to A at age 65 would not, without taking into account the disability benefit payments to A prior to age 65, satisfy the minimum vesting and accrual rules of section 411. Accordingly, the first day of the first period for which the disability payments are to be made to A would constitute A's annuity starting date, and any benefit paid to A would be required to be paid in the form of a QJSA (unless waived by A with the consent of B).

I have seen a number of plans under which, upon the participant's disability, the accrued benefit becomes payable, reduced for early payment (as in part (ii) of the Example), the participant makes a permanent election with respect to form that is subject to the QJSA rules, QPSA coverage is terminated, a retroactive annuity starting date is implemented, and there is no "second election" at normal retirement age. The intention, I think, is to be "done" with such participants (including the QPSA coverage) and not burden the plan administrator with the second election, which could be 20 years down the road. No comment on whether that's a good idea.

We now have a question regarding the proper treatment of a participant who recieved such a pension for a period of years, recovers from his disability, and resumes employement. Sponsor would like to amend the plan to give such participants credited service for the period of disability and treat all the payments (including the retro payment for the RASD) as "gravy"--i..e, an ancillary benefit. It struck me as odd that--for a period of time--the participant is getting his accrued benefit paid to him, then it suddenly becomes a true (ancillary) disability benefit, and he's once again entitled to an unreduced benefit at NRA. Maybe this is more common that I realized.

[Übernerd]

Not sure what this means. I thought IRS Reg. 1.411(d)-4 provides that a disability benefit is not protected, and can be eliminated via plan amendment. See part (d) of Q&A1.

Actually, § 1.411(d)-4, Q&A 1(d) doesn't refer to disability benefits. The only reference to disability in that reg has to do with the impermissible exercise of employer discretion (n/a to this question, I think). You're probably thinking of the definition of "ancillary benefit" in § 1.411(d)-3(g)(2)(ii):

(2) Ancillary benefit. The term ancillary benefit means . . .

(ii) A benefit payable under a defined benefit plan in the event of disability (

to the extent that the benefit exceeds the benefit otherwise payable

), but only if the total benefit payable in the event of disability does not exceed the maximum qualified disability benefit, as defined in section 411(a)(9) . . . .

I highlighted the part of this definition that makes me think the disability pension in question isn't ancillary: it doesn't exceed the benefit otherwise payable because it's an early payment of the accrued benefit and therefore reduces the benefit payable at normal retirement age. So it's not "ancillary," nor is it a "disability auxiliary benefit," because it reduces the benefit payable at NRA and the annuity starting date is the date of disability. Reg. § 1.401(a)-20, Q&A 10. I've always read these regs to differentiate between an early payment of the accrued benefit to a participant who isn't yet eligble for early retirement (what we have here) and something seperate from and in addition to the accrued benefit. Do I have this wrong? Thanks.

[ak2ary]

The benefit in your example does not flip from being the accrued benefit to having been an ancillary benefit. Rather what you have described is a situation where, upon recovery and re-employment, there is a pop-up in the remaining accrued benefit which is, of course, perfectly legal. That doesn't change the fact that the benefit that was being paid was the accrued benefit and the only way that those benefit payments stopped was via the suspension of benefits rules.

[Übernerd]

The benefit in your example does not flip from being the accrued benefit to having been an ancillary benefit. Rather what you have described is a situation where, upon recovery and re-employment, there is a pop-up in the remaining accrued benefit which is, of course, perfectly legal. That doesn't change the fact that the benefit that was being paid was the accrued benefit and the only way that those benefit payments stopped was via the suspension of benefits rules.

That's very helpful, thanks. I should have thought of a pop-up benefit.

[Guest ely]

What I have seen is that the disability benefit is a temporary annuity payable until the earlier of recovery and Normal retirement age. Once the participant reaches normal retirement age, he elects an option as usual for his accrued benefit. If he should die prior to NRD, the QPSA is payable.

[GBurns]

Now you have me really puzzled.

ak2ary stated "..what you have described ... is a pop-up.." to which you responded that you ". should have thought of a pop-up benefit."

How can you not have thought of something that you yourself described ? What have I missed ?

[Übernerd]

Now you have me really puzzled.

ak2ary stated "..what you have described ... is a pop-up.." to which you responded that you ". should have thought of a pop-up benefit."

How can you not have thought of something that you yourself described ? What have I missed ?

I just meant that I'm familiar with pop-up benefits and that, as ak2uary helpfully pointed out, the recovery provisions of the disability provision at issue somewhat resemble a pop-up. The similarity to something familar has allayed the concerns I expressed in the original post.