In service distributions

[Guest KLM]

Can a plan have an in service distribution provision that allows a participant to receive an in service distribution upon NRA provided the employee reduces his/her hours below the threshold in which he/she will continue to accrue benefits (in this case less than 1,000)? In other words, can the employer design the plan so that those receiving in service distributions do not receive any further accruals? Thanks for any help you can provide.

[Andy the Actuary]

Can a plan have an in service distribution provision that allows a participant to receive an in service distribution upon NRA provided the employee reduces his/her hours below the threshold in which he/she will continue to accrue benefits (in this case less than 1,000)? In other words, can the employer design the plan so that those receiving in service distributions do not receive any further accruals? Thanks for any help you can provide.

So long as NRA is reasonable. From the final NRA regs:

(3) Benefit distribution prior to retirement. For purposes of paragraph (b)(1)(i) of this section, retirement does not include a mere reduction in the number of hours that an employee works. Accordingly, benefits may not be distributed prior to normal retirement age solely due to a reduction in the number of hours that an employee works.

[Guest KLM]

But the question is under the proposed phased retirement rules - a participant had to continue to accrue benefits during the period he/she was receiving phased retirement regardless of whether his/her reduced schedule went below 1,000 hours - does the same rule apply to an in service distribution, or can the employer by plan design eliminate further accruals by requiring the employee to reduce his/her schedule. Your reply seems to suggest that the answer is yes.

[david rigby]

You may not have the problem expected. In my observation, an in-service distribution (assuming it's for the full amount of the accrued benefit) will most often mean that the participant does not accrue additional amounts. This is because most plans contain language that offsets the additional accrual by the amount of the distribution, and the net result is usually zero.

When is this not the case? Probably if there has been a significant increase in the benefit via amendment or a significant compensation increase.